Household Inflation Expectations and Consumer Spending: Evidence from Panel Data 
The earlier literature presents mixed findings on the relationship between household inflation expectations and consumption; those studies typically use survey data that capture “readiness to spend” qualitatively. In contrast, this paper, employing panel data assembled through two separate modules of the RAND American Life Panel survey, studies actual spending on durable goods and, separately, on nondurable goods and services.
In addition to enabling the authors to measure actual spending levels and to test the response of spending on nondurable goods and services separately from the response of durable-goods spending, the panel data allow them to control for unobserved heterogeneity across households that might affect inflation expectations and spending simultaneously. The data also allow them to assess heterogeneity in behavior along new dimensions, including whether a household has a mortgage, to reveal additional information about the mechanisms by which inflation expectations might influence spending.
Key Findings
- A 1 percentage point increase in the one-year-ahead inflation expectation raises durable goods spending by about 19 percent for the immediate quarter among households with a college-educated respondent and by 30 percent if the household also has a mortgage.
- Because these effects hold only for durable goods—which account for just 10 percent of total consumer spending—and only for a subset of consumers, the aggregate spending increase is limited to 1 percent or less over two quarters.
- For all types of households, expectations of an increase in unemployment are associated with a large negative impact on spending on durable goods and a modest negative impact on spending on nondurable goods and services.
- Due to this strong negative relationship between unemployment expectations and consumption, any positive effects of inflation expectations on total consumption may be more than offset if expectations for inflation and expectations for unemployment move in the same direction.
Implications
Though the authors find that some types of households (specifically, college-educated homeowners) substantially increase their spending on durable goods in response to an increase in expected inflation, they conclude that their results do not make a strong case for policies that would engineer expectations of higher inflation in order to boost aggregate consumption. The effects of raising inflation expectations are likely to be only modest, because, according to the authors’ analysis, they are limited to durable goods spending, and they pertain to just a subset of the population.
The authors also note that if consumers’ expectations for inflation and unemployment move in the same direction, as has been observed in some previous studies, then policies designed to stimulate consumption by raising inflation expectations could even be counterproductive, because such policies might also raise unemployment expectations and therefore depress spending.
Abstract
Recent research offers mixed results concerning the relationship between inflation expectations and consumption, using qualitative measures of readiness to spend. We revisit this question using survey panel data from the United States of actual spending from 2009 through 2012 that also allow us to control for household heterogeneity. We find that durables spending increases with inflation expectations only for certain types of households, while nondurables spending does not respond to inflation expectations. Moreover, spending decreases with an expected increase in unemployment. These results imply a limited stimulating effect of inflation expectations on aggregate consumption, which could be offset in part or in full if expectations for inflation and unemployment move in the same direction.