The Expected, Perceived, and Realized Inflation of US Households Before and During the COVID19 Pandemic

This paper explores the factors behind the rise in disagreement about inflation expectations among U.S. households during the COVID-19 pandemic. The authors use matched microdata on household spending and inflation expectations to analyze how price changes in everyday purchases influenced inflation perceptions and expectations. The study finds that, during the pandemic, inflation expectations rose sharply, and this increase was accompanied by greater variation in both the inflation experienced by households and their expectations for future inflation. In particular, low-income, low-education, and Black households experienced more significant inflation during the pandemic compared to others, which contributed to increased dispersion in both realized and perceived inflation across the population.

The paper shows that household inflation expectations are heavily shaped by the prices of goods they purchase regularly, such as food and beverages. During the pandemic, when these prices spiked, inflation expectations also surged. Households that experienced higher inflation in their daily shopping tended to anticipate more inflation in the future, with a stronger effect observed for less educated and lower-income households. These results suggest that household expectations are not only based on aggregate price movements but also on personal inflation experiences. Moreover, the authors highlight that disparities in inflation rates, driven by differences in household spending patterns, played a major role in the increasing disagreement about inflation expectations across households.

In addition to exploring realized inflation, the paper examines perceived inflation, which can diverge from actual price changes due to factors such as behavioral biases or differing consumption baskets. The authors find that perceived inflation was a stronger predictor of expected inflation than realized inflation, with media coverage and the goods frequently purchased by households amplifying their expectations. Despite the widespread view of the pandemic as a supply-side shock, the paper finds little evidence that households disagreed about the nature of the shock; instead, the increased disagreement about inflation expectations was largely due to differences in household-level inflation experiences. The paper concludes that the rise in inflation expectations during the pandemic is not a sign of de-anchoring, but rather reflects the heightened sensitivity of household expectations to price changes, particularly in goods that are integral to daily life.

Overall, this research provides valuable insights into the dynamics of household inflation expectations and highlights the importance of understanding how individual price experiences shape broader macroeconomic perceptions. These findings have important implications for policymakers, particularly in managing inflation expectations in the post-pandemic era. They suggest that even temporary price increases in key sectors can lead to significant shifts in consumer expectations, potentially influencing consumption behavior and economic recovery.