Inflation Expectations

In the literature, the impact of inflation expectation has mixed results on consumption pattern of countries. Some researchers showed its positive effect on consumer spending and some studies showed the negative results of this on consumer spending
Inflation expectations are important because agents’ behavior tends to be consistent with their beliefs (Zafar et al., 2011). Although actual expectations are unobservable but for the most part the academic community has agreed on using reported survey expectations as good proxy for expectation data (Roberts, 1995). A large part of literature concerned with inflation expectations questions the rationality of these expectations - do individuals think rationally when forming their expectations of inflation

2003, Souleles 2004, Branch 2004, Carroll 2003a, Capistran, Carlos and Timmermann, Allan 2009). Bryan and Venkatu (2001a and 2001b) used State Bank of Cleveland data to show that survey based estimates of inflation sentiment are systematically influenced by the demographic characteristics of the respondent; income, education, age, race, and gender are all strongly correlated with respondents’ perceptions of inflation and their forecast of future inflation. Bryan & Venkatu, (2001b) find that women, non-whites, high school dropouts and lower income groups expect higher inflation compared to others. Similarly, Madeira and Zafar (2012) find higher degree of heterogeneity in inflation expectations of women, less educated and ethnic groups. Lombardelli and Saleheen’s (2003) analyzed the Bank of England’s Inflation attitudes survey finds that people’s expectation of future inflation is driven by their occupation and age. In particular, older people expect higher inflation because they have experienced greater levels of inflation when averaged over their adult lives. Moreover, people base their expectations of future inflation on what has happened over a number of years rather than just the previous year. Souleles (2004) also finds more educated and higher income groups

Households’ views are influenced by forecasts of professionals through news, to which household are not attentive all the time; inattentiveness on the part of households generates heterogeneous inflation expectations as some households update their information set at higher frequency than the others (Carroll 2003a, Mankiw et. al. 2002). Along similar lines, Feige and Pearce (1976) argued that the information access and processing is costly, so the households turn to basic utility optimization while forming their expectations by combining cheaper new information and past experience. because of the differences in private information of individuals and slower expectations updating within these