Which Prices Affect Inflation Expectations? It Depends on Who You Ask.
This Economic Commentary shows that inflation expectations of professional forecasters and consumers are predicted by very different prices and have historically appeared to place different weights on different inflation components. Researchers Chris Campos, Michael McMain, and Mathieu Pedemonte find that professional forecasters weigh a relatively wide range of prices similar to those found in the consumer price index, while consumers seem to focus more narrowly on prices they see more often, such as those for food and new vehicles.
“While professional forecasters may be little fazed by large increases in some components of inflation, consumers might be highly weighting these categories and raising their inflation expectations, thereby affecting their economic decisions and thus future inflation,” say the researchers. “The fact that typical consumers may prioritize different basket components relative to those prioritized by professional forecasters generates a rift in inflation expectations between the two groups.”
Understanding the prevalence and magnitude of these differences can help inform policies that aim to anchor consumers’ expectations more generally, while communicating with the public about why prices are changing in certain key sectors may help avoid any long-lasting changes in consumers’ inflation expectations.
Read more: Understanding Which Prices Affect Inflation Expectations
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