Personal Experience as the Driver of Heterogeneity in Inflation Expectations during Crises: An Empirical Assessment of the Michigan Survey of Consumers

Abstrakt

This paper studies heterogeneity in consumers’ inflation expectation during shocks using micro-level data from the University of Michigan’s Survey of Consumers. By performing a linear regression, we validate suggested heterogeneity across demographic groups for our dataset ranging from 2000 to 2020. In detail, we document that women, non-college, low-income and older people have higher inflation expectations. Furthermore, we analyse how these tendencies change at the onset of an economic shock. The panel data feature of the survey allows us to build revision variables and conduct a first-difference regression while adding demographic explanatory variables to the model. Hereby, we isolate the impact of an economic shock and analyse three economic shocks individually. We find a significant heterogeneity across age groups during the Corona Crisis. Individuals between 18 and 25 years revise their inflation expectation by almost 170 basis points more compared to the reference group. In contrast, individuals who are at least 80 years old revise their inflation expectations significantly upwards compared to other age groups. The heterogeneity across age groups is tested by adding personal local experiences and personal lifetime experiences as predictors to the model. Personal local experiences, proxied by age-specific inflation rates derived from expenditure micro-evidence, do not explain the heterogeneity. Personal lifetime experiences, proxied by an individual crisis factor, partly offer an explanation. Our results have important implications for policymakers as the ignorance of the found heterogeneity may have a severe effect on the effectiveness of monetary policy especially during crises