Inflation Expectations, Learning and Supermarket Prices
Information frictions play a central role in the formation of household inflation expectations, but there is no consensus about their origins. We address this question with novel evidence from survey experiments. We document two main findings. First, individuals in lower-inflation contexts have significantly weaker priors about the inflation rate. This finding suggests that rational inattention may be an important source of information frictions. Second, cognitive limitations also appear to be a source of information frictions: even when information about inflation statistics is made readily available, individuals still place a significant weight on less accurate sources of information, such as their memories of the price changes of the supermarket products they purchase. We discuss the implications of these findings for macroeconomic models and policy-making.
Previously circulated as "Inflation Expectations, Learning and Supermarket Prices: Evidence from Field Experiments." We would like to thank Robert Barro, Raj Chetty and David Laibson for their valuable input at the early stages of the project. We also thank useful comments from Alberto Alesina, Nageeb Ali, Rüdiger Bachmann, Christian Borgs, Sebastian Di Tella, Emmanuel Farhi, Matthew Gentzkow, N. Gregory Mankiw, Markus Mobius, Andrés Neumeyer, Roberto Rigobon, Tanya Rosenblat, Guido Sandleris, Tavneet Suri, Martin Tetaz, Glen Weyl, Fernando Yu, and participants in the seminars at Harvard University, MIT Sloan, Microsoft Research New England, Universidad de San Andres, Universidad Torcuato Di Tella, the Chicago-NYU International Macro Finance Conference, the 2016 AEA Meetings, the 6th Ifo Conference on Macroeconomics and Survey Data, and the NY Federal Reserve Subjective Expectations Conference. Julián Amendolaggine and Nicolás Badaracco did excellent work as research assistants. We would also like to thank Tomás Pessacq and Carolina Yellati for their collaboration in conducting the experiments, and MIT Sloan and CEDLAS-UNLP for their funding. This project was reviewed and approved by the Committee on the Use of Humans as Experimental Subjects at MIT. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Alberto Cavallo has an ownership stake in PriceStats LLC, a private company that uses scraped online data to compute inflation indices.
Cavallo, Alberto, Guillermo Cruces, and Ricardo Perez-Truglia. 2017. "Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments." American Economic Journal: Macroeconomics, 9 (3): 1-35. DOI: 10.1257/mac.20150147