Expectations data

CHAPTER 2. MONETARYPOLICY AND HOUSEHOLDEXPECTATIONS 54

The focus of this chapter are inflation expectations. In the MSC, inflation expec-tations are elicited in a two-step manner.⁷ First, the respondents are asked about the direction of the expected change in prices:

Q1 During the next 12 months, do you think that prices in general will go up, or go down, or stay where they are now?

If the respondents answer ‘stay where they are’, they will be asked whether they actually mean constant prices or whether they mean a constant inflation rate. If they confirm that they mean constant prices, their answer is recorded as 0. In case they mean a constant inflation rate, they are asked the same follow-up question as those respondents who are expecting a change, namely:

Q2 By about what percent do you expect prices to go(up/down)on the average, dur-ing the next 12 months?

Whether the questions mentionsupordowndepends on the answer in Q1. Answers are recorded as integer values. If the households provide an answer larger than 5% in either case, they are prompted to confirm this answer. If they say, that they do not know in response to Q2, they are asked again referring to ‘cents on the dollar’ instead of percent. Appendix B2.1 shows the detailed set-up of the questions.

From now on, I focus on the subset of households relevant for my analysis, namely those who are interviewed twice and report quantitative inflation expectations in both interviews: around 85% of all households with a panel dimension (45, 874) in fact re-port inflation expectations twice. Table 2.1 shows summary statistics for these inflation expectations. I consider both the full sample as well as a breakdown by demographic groups. The average over the full sample is 3.4% and the median response is 3%.⁸ These values are substantially higher than actual CPI inflation in the United States, which was around 2.2% during the sample period. Panel (a) of Figure 2.1 shows that the difference has grown larger since the financial crisis. This observation has been linked to energy prices and used to explain the missing disinflation puzzle (Coibion and Gorodnichenko 2015b). Panel (b) highlights the strong correlation between con-sumers’ expected inflation and the level occurring in the following six months. De-spite the level difference, inflation expectations and actual inflation co-move not only contemporaneously but also for leads of inflation. The strong contemporaneous corre-lation is in line with the fact that households extrapolate from observed price changes (D’Acunto et al. 2019b), while the correlation with future actual inflation indicates some predictive power of these expectations.

7The full questionnaire is available at https://data.sca.isr.umich.edu/fetchdoc.php?docid=

24776.

8Remember the MSC only reports integer values.

CHAPTER 2. MONETARYPOLICY AND HOUSEHOLDEXPECTATIONS 56

Table 2.1:Inflation expectations, balanced sample, 1994 to 2016

Observ. Share Mean Std.Dev. P10 P25 P50 P75 P90

All 91748 3.40 4.08 0 1 3 5 9

Gender

Male 46014 0.50 3.05 3.59 0 1 3 5 7

Female 45734 0.50 3.74 4.50 0 1 3 5 10

Renter/owner

Owns home 72846 0.80 3.35 3.93 0 1 3 5 8

Rents home 18684 0.20 3.55 4.63 0 1 3 5 10

Cohorts

Born before 1970 75848 0.83 3.42 4.05 0 1 3 5 9

Born 1970 and later 15574 0.17 3.27 4.23 0 1 3 5 9

Age

18-39 years 26047 0.28 3.29 4.29 0 1 3 5 8

40-59 years 37197 0.41 3.38 3.96 0 1 3 5 8

60 years and older 28179 0.31 3.52 4.04 0 1 3 5 10

Education

High school or less 27063 0.30 3.85 4.67 0 1 3 5 10

Some college, no degree 24058 0.26 3.56 4.24 0 1 3 5 10

College degree 23770 0.26 3.05 3.59 0 1 3 5 6

Graduate studies 16667 0.18 2.90 3.32 0 1 3 4 5

Income

Bottom 33% 19938 0.23 4.08 4.89 0 1 3 5 10

Middle 33% 30287 0.35 3.47 4.04 0 1 3 5 10

Top 33% 36456 0.42 2.93 3.48 0 1 3 4 6

Stock market participation

No stocks 24696 0.37 3.76 4.34 0 1 3 5 10

Investment in bottom 33% 11673 0.18 3.49 4.00 0 1 3 5 10

Investment in middle 33% 13555 0.21 3.22 3.73 0 1 3 5 8

Investment in top 33% 16178 0.24 2.85 3.21 0 1 3 4 5

Notes: Table shows summary statistics for inflation for the balanced sample of households, i.e. those reporting quantitative inflation expectations (Q2) in both interviews. The first row shows all households in the balanced sample. The remaining rows show statistics for different demographic groups. The sec-ond column (‘Share’) shows how the demographic traits are distributed within the sample by providing the share in all observations for the respective subgroup. The distribution of demographic groups in the balanced sample differs slightly from the full sample, as shown in Table B.1 in Appendix B1.

In addition to the aggregate time series, I also consider the cross sectional hetero-geneity of reported expectations. Table 2.1 shows that the interquartile range is 1% to 5%, and the bottom and top 10 percent responses are 0% and 9%, respectively. Further-more, 83% of all answers fall within -2% and 5%, which is the range of actual inflation in the sample period. However, Figure B.1 in Appendix B1 shows that some

house-Figure 2.1: One-year ahead inflation expectations and actual inflation, 1994 to 2016

(a)Time series

-2 0 2 4 6

Inflation in percent

1995m1 2000m1 2005m1 2010m1 2015m1

MSC Inflation expectations CPI inflation

(b)Correlation: expected intand realized int+k

0 .2 .4 .6 .8

Correlation coefficient

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6

Point estimate 95% confidence interval

k

Notes:Expectations are measured as the mean of all answers in each month from the MSC (only house-holds who provided expectations in both their interviews). Actual inflation is the seasonally adjusted year-on-year change in the CPI for All Urban Consumers taken from the FRED database. All data are monthly.

holds also report very large numbers, up to -50% and +50%. In addition, bunching at multiples of five is noticeable. Rounding to multiples of five or ten is considered to indicate uncertainty about the forecast (Binder 2017c). I will take both the rounding and the very large responses into account in the analysis later on.

The remainder of Table 2.1 shows some details on the demographic composition of the sample, and inflation expectations by the different groups.⁹ The variables dis-played are those used later on to analyze potential heterogeneity of the effects. I select them based on what previous literature showed to be relevant for expectation forma-tion.¹⁰

The genders are fully balanced in the sample. In line with previous findings, women have higher inflation expectations than men. This difference has recently been linked to differences in the contribution to grocery shopping at the household level (D’Acunto, Malmendier, and Weber 2020). The vast majority of households (80%) owns a house.

There is again a slight difference is expectations: renters have somewhat higher expec-tations than owners. Only 17% of all respondents were born after 1970, which means they did not experience the high inflation periods in the 1970s. In line with the results by Malmendier and Nagel (2016), they report lower expectations than households born earlier. All respondents in the MSC are at least 18 years old. They can be split into

9The questionnaire provided by the MSC does no contain the questions about the demographic vari-ables, in particular not the one about income, only the questions about home and stock ownership are shown. Details on these can be found in Appendix B2.2.

10Note that the shares of the different groups are computed only for household reporting inflation expectations and responding to two interviews. This sample differs slightly from the full MSC sample, as shown in Table B.1 in Appendix B1.

CHAPTER 2. MONETARYPOLICY AND HOUSEHOLDEXPECTATIONS 58

roughly equal groups by choosing 40 years and 60 years as cut-off points. Inflation expectations increase with age. Education levels are recorded in the MSC at a detailed grade level. To achieve roughly equal sized groups for the analysis later on, I reclassify this data into four categories: high school degree or less, some college but no degree, undergraduate college degree, and graduate studies. For education, we see a strong decrease in inflation expectations with the length of education. The negative correla-tion is in line with results on the role of the socio-economic status for expectacorrela-tions by authors such as Das et al. (2020).

Finally, the MSC collects information on household income and stock market par-ticipation. For income, I consider the tercile split.¹¹ For stock market participation, I separate those who invest from those who do not. The former are then further split into terciles based on the amount they invest. In total only 63% of all respondents invest in the stock market. Also for income and stock ownership inflation expectations decrease with higher levels of income and investment, in line with the results for education.