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