How Economic Crises Affect Inflation Beliefs: Evidence from the COVID-19 Pandemic

Armantier, Olivier; Koşar, Gizem; Pomerantz, Rachel; Skandalis, Daphne; Smith, Kyle; Topa, Giorgio; Van der Klaauw, Wilbert

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How Economic Crises Affect Inflation Beliefs: Evidence from the COVID-19 Pandemic

Abstract: This paper studies how inflation beliefs reported in the New York Fed’s Survey of Consumer Expectations have evolved since the start of the COVID-19 pandemic. We find that household inflation expectations responded slowly and mostly at the short-term horizon. In contrast, the data reveal immediate and unprecedented increases in individual inflation uncertainty and in inflation disagreement across respondents. We find evidence of a strong polarization in inflation beliefs and we show differences across demographic groups. Finally, we document a strong link, consistent with precautionary saving, between inflation uncertainty and how respondents used the stimulus checks they received as part of the 2020 CARES Act.

Keywords: inflation expectations; inflation uncertainty and disagreement; COVID-19;

JEL Classification: E16; E21; E31;