## Shaping Expectations

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**Canonical URL:** [Shaping Expectations](https://www.imf.org/-/media/files/publications/fandd/article/2023/march/weber-shaping-expectations.pdf)

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### Household inflation expectations: empirical findings
- Survey evidence: when asked 25,000 Americans in 2018 what they thought the average inflation rate in the US was, fewer than 20 percent of survey participants answered “about 2 percent.” Almost 40 percent reported a number higher than 10 percent (Coibion, Gorodnichenko, and Weber 2022).
- Gender and role differences: using New York Fed consumer expectations data, between 2011 and 2018 men on average expected inflation to rise to about 4 percent over 12 months, while women expected a rate of 6 percent. Inflation in fact averaged below 2 percent (D’Acunto, Malmendier, and Weber 2021).
- Household roles matter: women expect higher inflation than men on average only in “traditional households” where women do all the grocery shopping; the gender gap disappears in families where the male household head occasionally shops.
- Exposure to prices shapes expectations: households rank grocery shopping as the most relevant source of information when gauging inflation (results from the Chicago Booth Expectations and Attitudes Survey, D’Acunto and others 2021).
- Panel evidence from purchases: leveraging NielsenIQ Homescan data on 50,000 households and constructing household-specific price indices, families hit hardest by inflation expected an inflation rate 0.7 percentage point higher than other households, on average (D’Acunto and others 2021).
- Item salience and asymmetry:
  - Price changes in categories used more regularly (for example, milk and eggs) produce immediate increases in overall inflation expectations, both in times of low and high inflation.
  - Households pay more attention to price hikes than to price cuts.
- Dynamics during 2021: families updated their inflation expectations in the summer of 2021 when prices rose in categories consumers cared about most—even as most central banks characterized the pressures as temporary—implying household inflation expectations would take time to come back down even if central banks curbed inflation in the near term.

### Communication, complexity, and channels
- Simplicity of message:
  - More complex policies are harder to explain and less effective at shaping expectations.
  - In a comparison of preannounced consumption tax increases with forward guidance (D’Acunto and others 2020), both policies are equivalent in the New Keynesian model, but differ in complexity and public understanding.
- Natural experiment in Germany:
  - Germans altered inflation expectations and spending only after the November 2005 announcement that consumption taxes would increase by 3 percentage points in January 2007.
  - By contrast, the summer 2013 announcement by then-ECB President Mario Draghi that interest rates would stay at current levels or fall had no impact on household inflation expectations or spending patterns in Germany.
- Message content and instrument vs target framing:
  - In Finland experiments (D’Acunto and others 2020), truthful information about policy actions was presented either as a “target” communication (specifies the aim) or an “instrument” communication (details the policy to achieve the aim). Only the target communication effectively improved individuals’ income expectations.
- Terminology and source credibility:
  - Simple terms like “current inflation,” the “inflation target,” or “inflation forecast” are most effective in managing individuals’ inflation expectations (Coibion, Gorodnichenko, and Weber 2022).
  - The medium matters: newspaper coverage of the Federal Reserve, though simpler to read, has less impact on expectations than official FOMC statements because households rate the credibility of different news sources differently. In the US, newspapers rank low on credibility for economic information, whereas social media and Twitter rank high.
  - Central banks cannot rely on the media alone to transmit monetary policy announcements to households.

### Messenger identity and reach
- Identity effects:
  - When message content and forecasts are held constant, women and Black survey respondents are substantially more likely to revise their expectations when the message comes from either Mary Daly or Raphael Bostic (a female and a Black male regional Fed president) rather than from Thomas Barkin (a white male regional Fed president) (D’Acunto, Fuster, and Weber 2021).
  - Emphasizing female or Black male presence on the policy committee increases women’s and Black respondents’ trust in the Federal Reserve and increases their desire for information about monetary policy.
- Challenge of reach:
  - Reaching ordinary families, who typically do not follow official releases, is the biggest communication challenge for central banks.
  - Creative and clear communications targeted at households are necessary to fill the gap between official announcements and household expectations.

### Key implications for policy
- Household expectations are not well anchored and often overestimate future inflation; central banks should not assume households behave like professional forecasters or financial markets.
- Policy communications should prioritize:
  - Simplicity in wording (use of clear terms such as “current inflation,” “inflation target,” “inflation forecast”).
  - Target-focused messaging rather than technical instrument details when aiming to influence household expectations.
  - Consideration of the transmission medium and the direct use of credible official channels rather than relying solely on media coverage.
  - Attention to the identity of messengers to improve trust and information uptake among underrepresented demographic groups.
- Monitor and account for heterogeneous exposure to price changes (via shopping patterns and salient goods) because these drive differential expectation updates and can slow the decline of household inflation expectations even after headline inflation eases.

*Article author: MICHAEL WEBER, associate professor of finance at the University of Chicago’s Booth School of Business.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/march/weber-shaping-expectations.pdf_