Working Paper Revision
Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation
Abstract: We implement a novel methodology to disentangle two-way causality in inflation and income expectations in a large, nationally representative survey of US consumers. We find a 20 percent passthrough from expected inflation to expected income growth, but no statistically significant effect in the other direction. Passthrough is higher for higher-income individuals and men. Higher inflation expectations increase consumers’ likelihood to search for higher-paying new jobs. In a calibrated search-and-matching model, dampened responses of wages to demand and supply shocks translate into greater output fluctuations. The survey results and model analysis provide a labor market channel for why people dislike inflation.
Keywords: inflation; wage-price spiral; expectations; randomized controlled trial;
JEL Classification: C83; E24; E31; E71;
https://doi.org/10.26509/frbc-wp-202221r
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https://doi.org/10.26509/frbc-wp-202221r
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Provider: Federal Reserve Bank of Cleveland
Part of Series: Working Papers
Publication Date: 2023-03-27
Number: 22-21R