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Working Paper

Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation

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We implement a novel methodology to disentangle two-way causality in inflation and income expectations in a large, nationally representative survey of US consumers. We find a 20 percent passthrough from expected inflation to expected income growth, but no statistically significant effect in the other direction. Passthrough is higher for higher-income individuals and men. Higher inflation expectations increase consumers’ likelihood to search for higher-paying new jobs. In a calibrated search-and-matching model, dampened responses of wages to demand and supply shocks translate into greater output fluctuations. The survey results and model analysis provide a labor market channel for why people dislike inflation.
Topics
Labor economics
Inflation
03.27.2023ISSN 2573-7953 WP 22-21ROriginal Paper WP 22-21DOI 10.26509/frbc-wp-202221r
Keywords Inflation, Wage-price Spiral, Expectations, Randomized Controlled Trial
JEL Classification Codes E31, E24, E71, C83

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

Hajdini, Ina, Edward S. Knotek II, John Leer, Mathieu Pedemonte, Robert W. Rich, and Raphael S. Schoenle. 2023. “Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation.” Federal Reserve Bank of Cleveland, Working Paper No. 22-21R. https://doi.org/10.26509/frbc-wp-202221r