Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation

RePEc Short ID: pha1454
ORCID iD: 0000-0002-5982-0914

Hajdini, Ina; Knotek, Edward S.; Leer, John; Pedemonte, Mathieu; Rich, Robert W.; Schoenle, Raphael

doi:10.26509/frbc-wp-202221r

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