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Working Paper

Greater Than the Sum of the Parts: Aggregate vs. Aggregated Inflation Expectations

Using novel survey evidence on consumer inflation expectations disaggregated by personal consumption expenditure (PCE) categories, we document the paradox that consumers' aggregate inflation expectations usually exceed any individual category expectation. We explore procedures for aggregating category inflation expectations, and find that the inconsistency between aggregate and aggregated inflation expectations rises with subjective uncertainty and is systematically related to socioeconomic characteristics. Overall, our results are inconsistent with the notion that consumers' aggregate inflation expectations comprise an expenditure-weighted sum of category beliefs. Moreover, aggregated inflation expectations explain a greater share of planned consumer spending than aggregate inflation expectations.
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Topics
Inflation
06.22.2022ISSN 2573-7953 WP 22-20DOI 10.26509/frbc-wp-202220
Keywords Household expectations, Survey, Sectoral expectations, Inflation expectations
JEL Classification Codes C83, E31, E52

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Dietrich, Alexander M., Edward S. Knotek II, Kristian Ove R. Myrseth, Robert W. Rich, Raphael S. Schoenle, and Michael Weber. 2022. “Greater Than the Sum of the Parts: Aggregate vs. Aggregated Inflation Expectations.” Federal Reserve Bank of Cleveland, Working Paper No. 22-20. https://doi.org/10.26509/frbc-wp-202220