Inflation Levels and (In)Attention
Forming expectations is essential for optimal decision making and sits at the core of economic behavior. Will inflation expectations remain anchored in light of recent pandemic-related increases in inflation? That’s a central question in the current policy debate. The authors of this paper construct two different proxy measures of consumers’ inattention in order to explore evidence of inattention among U.S. consumers. This paper is the first in the literature to examine direct measures of consumer inattention to inflation over a long period of time, rather than inferring inattention from the behavior of inflation forecasts as done in previous works—an important examination since inflation expectations are key determinants of economic activity.
- Consumers pay more attention to inflation when it is high.
- There is greater inattention when inflation is low.
- Results from both measures confirm the authors’ hypothesized negative inattention-inflation relationship, or positive attention-inflation relationship.
- Higher inflation is associated with more news reporting about inflation, which indicates greater media attention to inflation and potentially lowers consumers’ cost to acquiring information about inflation.
- Consumer attention to inflation is positively correlated with news reporting and, importantly, this relationship is stronger when inflation levels are high.
- Consumers’ inflation expectations become more sensitive to actual inflation as inflation rates rise.
The findings in this paper suggest that there is a risk of an acceleration in the increases in inflation expectations if actual inflation remains high. Results also suggest that expectations are better anchored when inflation is low. This is significant in our current pandemic-related acceleration of inflation. These patterns in consumer attention to inflation may also have implications for other economic behavior such as the sensitivity of consumption decisions and wage negotiations to changes in inflation.
Inflation expectations are key determinants of economic activity and are central to the current policy debate about whether inflation expectations will remain anchored in the face of recent pandemic-related increases in inflation. This paper explores evidence of inattention by constructing two different measures of consumers’ inattention and documents greater inattention when inflation is low. This suggests that there is indeed a risk of an acceleration in the increases in inflation expectations if actual inflation remains high.