Shaping Expectations

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Prices reflect what people expect them to be—at least in part; monetary authorities watch inflation expectations closely because they affect people’s behavior in the present.
Very little is understood about how people form expectations; central banks typically focus on professional forecasters and financial markets, not households, because economists tend to assume that the inflation expectations of households are well anchored.

In 2018, when 25,000 Americans were asked 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 of those respondents reported a number higher than 10 percent (Coibion, Gorodnichenko, and Weber 2022).
Using New York Federal Reserve survey of consumer expectations data between 2011 and 2018:
- Men on average expected inflation to rise to about 4 percent over 12 months.
- Women on average expected a rate of 6 percent.
- Actual inflation averaged below 2 percent (D’Acunto, Malmendier, and Weber 2021).
These patterns indicate that most households do not have well-anchored expectations and tend to overestimate future inflation.

Households rank grocery shopping as the most relevant source of information when gauging inflation (D’Acunto and others 2021).
Analysis of NielsenIQ Homescan panel data (50,000 households) with household-specific price indices shows:
- Families hit hardest by inflation expected an inflation rate 0.7 percentage point higher than other households, on average.
The “gender gap” in inflation expectations:
- On average, women expect higher inflation than men, but this holds only for “traditional households,” where women do all the grocery shopping.
- In families where the male household head occasionally shops, the gender gap disappears.

Not all price changes matter equally: price changes in categories important to, or used more regularly by, consumers—such as milk and eggs—produce immediate increases in overall inflation expectations.
Households tend to pay more attention to price hikes than to price cuts.
These factors explain why families updated their inflation expectations in the summer of 2021, when prices rose in categories consumers cared about most.
Even if central banks curb inflation in the near term, household inflation expectations would take time to come back down.

More complex policies are more difficult to explain and therefore less likely to shape expectations.
Comparison of preannounced future consumption tax increases with forward guidance:
- Through the New Keynesian model, both policies should have the same effect on inflation expectations, but they differ in complexity and required understanding.
- German evidence from the European Commission consumer survey:
- Germans altered their inflation expectations and spending plans only after the November 2005 announcement that consumption taxes would increase by 3 percentage points in January 2007.
- The summer of 2013 announcement by 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.
Target communications (messages that specify the aim of a policy without detailing the measures) are more effective at improving individuals’ income expectations than instrument-focused communications (D’Acunto and others 2020):
- In surveys in Finland during spring of 2020, only the target communication effectively improved respondents’ income expectations.

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 source and medium matter:
- Newspaper coverage of the Federal Reserve, though simpler to read, has less impact on expectations than official FOMC statements.
- In the US, households rate newspapers on average low for economic credibility, whereas social media and Twitter rank high.
- Central banks cannot rely on the media alone to transmit monetary policy announcements to households.
Identity of the sender matters:
- Even when the message and forecasts remain constant, women and Black survey respondents are substantially more likely to revise their expectations when the message comes from 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).
- Emphasis on female or Black male presence on the FOMC increases women’s and Black survey participants’ trust in the Federal Reserve and piques their desire for information about monetary policy (D’Acunto, Fuster, and Weber 2021).

Recognize that individuals in general do not have well-anchored inflation expectations; households focus on price changes of relevant individual goods and weight price increases more than price decreases.
Use simple, target-focused communications to shape household expectations effectively.
Choose communication media mindful of households’ trust and usage patterns; official statements can be more effective than newspaper coverage for some audiences.
Consider messenger identity and committee diversity as tools to increase trust and reach underrepresented groups.
Develop creative, clear communications aimed at ordinary families, who typically do not follow official releases, to bridge the gap between central bank announcements and household expectations.

Source: Shaping Expectations, Michael Weber, F&D Magazine, March 2023.

F&D March 2023: Shaping Expectations
- F&D March 2023: Shaping Expectations (Markdown version)
- F&D March 2023: Shaping Expectations (PDF)