a column by Francesco D'Acunto, Ulrike Malmendier and Michael Weber for VOX: CEPR’s Policy Portal
Policymakers seek to manage inflation expectations, but we understand little about how households form and update their expectations of inflation.
The column tests Lucas's conjecture that the price changes households observe, rather than all price changes, drive expectations. A measure of individual household consumption weighted by the frequency of purchase is a statistically and economically significant driver of households' expectations.
This challenges the modelling assumptions that central bank policymakers currently make.
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