More important, these findings imply that even if central banks were successful in curbing inflation in the near term, household inflation expectations would take time to come back down. These factors explain why families updated their inflation expectations in the summer of 2021, when most central banks continued to preach the gospel of temporary inflationary pressures-prices rose in the categories consumers cared about most. Households also tend to pay more attention to price hikes than cuts. If they occur in categories that are important to, or used more regularly by consumers-such as milk and eggs-we see immediate increases in overall inflation expectations, both in times of low and high inflation. Not all price changes matter equally, however. With information on what families buy, where they shop, and what they pay, we crafted a household-specific price index and found that families hit hardest by inflation expected an inflation rate 0.7 percentage point higher than other households, on average. To test this further, we leveraged data from the 50,000 households that participate in the NielsenIQ Homescan panel. It turns out that households rank grocery shopping as the most relevant source of information. To better understand how exposure to price changes shapes expectations, we fielded another survey in which we asked participants directly which sources of information were most important to them when gauging inflation (D’Acunto and others 2021). In families where the male household head occasionally shops, the gap disappears. On average, women expect higher inflation than men, but that holds only for “traditional households,” where women do all the grocery shopping. We spoke to both male and female household heads who record their grocery purchases to confirm whether that’s the case.
This suggests there might be a “gender gap” in inflation expectations. Inflation in fact averaged below 2 percent (D’Acunto, Malmendier, and Weber 2021).
Using data from the New York Federal Reserve survey of consumer expectations we find that between 20 men on average expected inflation to rise to about 4 percent over 12 months, while women expected a rate of 6 percent (a difference that holds regardless of financial literacy). Not only do most households not have well-anchored expectations, they also tend to overestimate future inflation. Yet, when we asked 25,000 Americans in 2018 what they thought the average inflation rate in the US was, fewer than 20 percent of survey participants answered, “about 2 percent.” Almost 40 percent reported a number higher than 10 percent (Coibion, Gorodnichenko, and Weber 2022).
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Central banks typically focus on professional forecasters and financial markets, not households, because economists tend to assume that the inflation expectations of households are well anchored (they don’t change in response to short-term developments). However, very little is understood about how people form expectations. They affect people’s behavior in the present. That’s why monetary authorities watch inflation expectations closely. Prices reflect what people expect them to be-at least in part. Surveys show household inflation expectations are less stable than we thought
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