## U.S. Inflation Expectations During the Pandemic

_IMF Working Papers, February 9, 2024_

## Source details

**Canonical URL:** [U.S. Inflation Expectations During the Pandemic](https://www.imf.org/en/publications/wp/issues/2024/02/09/u-s-544459)

## Other formats

- [Markdown version](/en/publications/wp/issues/2024/02/09/u-s-544459/index.md)
- [Structured JSON version](/en/publications/wp/issues/2024/02/09/u-s-544459/index.json)
- [Bundle manifest](/en/publications/wp/issues/2024/02/09/u-s-544459/bundle-manifest.json)

## Bibliographic details
- Authors: Euihyun Bae, Andrew Hodge, Anke Weber
- Published: February 9, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400266867.001

---

### Summary findings
- The distribution of consumer inflation expectations at one-year and five-ten year horizons has widened since the surge of inflation during 2021, along with the mean.
- Persistently high and heterogeneous expectations of consumers with less education and lower income are mainly responsible for the widening and higher mean.
- Inflation expectations of low income and female consumers are consistent with using less complex forecasting models and are more backward-looking.
- A simple model of adaptive learning can mimic the change in inflation expectations over time for different demographic groups.
- A medium-scale DSGE model with adaptive learning, estimated during 1965-2022, has a time-varying solution that produces lower forecast errors for inflation than a variant with rational expectations.
- The estimated model interprets the surge of inflation in 2021 mainly as the result of a price markup shock, which is more persistent and requires a larger and more persistent monetary policy response than under rational expectations.

### Data and empirical patterns
- Micro-level data source: University of Michigan Survey of Consumers.
- Key observed patterns:
  - Widening of expectation distributions at one-year and five-ten year horizons.
  - Demographic heterogeneity concentrated among consumers with less education and lower income.
  - Gender differences: female consumers’ expectations are more backward-looking.

### Modeling approach and results
- Behavioral representation: simple adaptive learning models replicate group-level evolution of expectations.
- Structural model: medium-scale DSGE model with adaptive learning, estimated over 1965-2022, yields a time-varying solution.
- Model comparison:
  - Adaptive-learning DSGE model produces lower forecast errors for inflation than a rational-expectations variant.
  - The surge of inflation in 2021 is best interpreted in the model as a price markup shock that is more persistent under adaptive learning.

### Policy implications
- The persistence and nature of the 2021 inflation surge (interpreted as a persistent price markup shock) imply:
  - A larger monetary policy response is required than would be suggested under rational expectations.
  - Monetary policy may need to be more persistent to address inflation driven by persistent markup shocks.
- Heterogeneous and backward-looking expectations among low income and female consumers suggest targeted communication and policy measures may help anchor expectations.

---

## Content in this bundle

- **Working Paper**
  - [Working Paper (Markdown version)](/-/media/files/publications/wp/2024/english/wpiea2024025-print-pdf.pdf.md){rel="alternate" type="text/markdown"}
  - [Working Paper (PDF)](/-/media/files/publications/wp/2024/english/wpiea2024025-print-pdf.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2024/02/09/u-s-544459_