Inflation Expectations of Households and the Upgrading Channel

This paper combines several administrative data and a survey experiment to evaluate the role of lifestyle changes in influencing inflation expectations. Using data from Nielsen’s Homescan Panel, as well as a leading bank in Singapore, we first document that households are upgrading across categories and within categories of goods. We then use a survey experiment to show that price information of better-quality products will lead to higher inflation expectations. The effects on inflation expectations are smaller when the price information of both higher and lower quality products is made available, implying that increasing product variety of lower quality products reduced inflation expectations. Frequent shoppers tend to allocate more weight on higher quality goods when forming inflation expectations. These results suggest that exposure to better quality goods plays an important role in the formation of inflation expectations. Moreover, we map the personal shopping experience with our survey at the group level and find a positive relationship between the increase in quality of supermarket shopping and inflation expectations. Our findings highlight the relationship between personal experience, product variety and inflation expectations.

Agarwal, Sumit and Chua, Yeow Hwee and Song, Changcheng, Inflation Expectations of Households and the Upgrading Channel (March 4, 2020). Available at SSRN: https://ssrn.com/abstract=3559176 or http://dx.doi.org/10.2139/ssrn.3559176