Abstract:
This paper develops a theoretical framework to understand heterogeneity in inflation expectations. I integrate two mechanisms previously studied in isolation, exposure to salient prices and forecast confidence, within a Bayesian learning model. Empirically, I examine these mechanisms through the well-documented gender gap in inflation expectations. German and US household data confirm that forecast confidence is the dominant driver, while exposure to grocery prices matters only for low-confidence respondents. Forecast confidence is improved by financial literacy. Beyond gender, I provide a lens to study demographic heterogeneity, and show that salient prices exert greater influence during periods of elevated macroeconomic uncertainty.
