Understanding Which Prices Affect Inflation Expectations

Abstract

Inflation expectations have an impact on one's economic behavior. We show that the inflation expectations of professional forecasters and consumers are predicted by very different prices. While professional forecasters weigh prices similar to the consumer price index, consumers seem to focus on prices they see more often, such as those for food and new vehicles. These are also prices that have seen disproportionally high volatility since the onset of the pandemic. We argue that heterogeneity in the importance of component-specific inflation can have relevant economic implications and disproportionate effects on consumers' inflation expectations that can, in turn, affect economic behavior.