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How Inflation Expectations De-Anchor: The Role of Selective Memory Cues

By: Nicola Gennaioli, Marta Leva, Raphael Schoenle and Andrei Shleifer
  • Format:Print
  • | Language:English
  • | Pages:40
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Abstract

In a model of memory and selective recall, household inflation expectations remain rigid when inflation is anchored but exhibit sharp instability during inflation surges, as similarity prompts retrieval of forgotten high-inflation experiences. Using data from the New York Fed’s Survey of Consumer Expectations and the University of Michigan’s Consumer Survey, we show that similarity can quantitatively account for the sharp post-pandemic rise in inflation expectations, particularly among the elderly. The memory-based model also accounts for how people estimate future inflation ranges and why they neglect infrequent experiences when forming point expectations. These predictions are likewise supported by the data.

Keywords

Cognition and Thinking; Inflation and Deflation; Personal Finance

Citation

Gennaioli, Nicola, Marta Leva, Raphael Schoenle, and Andrei Shleifer. "How Inflation Expectations De-Anchor: The Role of Selective Memory Cues." NBER Working Paper Series, No. 32633, June 2024.

About The Author

Andrei Shleifer

Negotiation, Organizations & Markets
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