Investor attention and consumer price index inflation rate: Evidence from the United States

Abstract

Explaining and forecasting inflation are important and challenging tasks because inflation is one focus of macroeconomics. This paper introduces novel investor attention to the field of inflation for the first time. Specifically, the Granger causality test, vector autoregression (VAR) model, certain linear models, and several statistical indicators are adopted to illustrate the roles of investor attention in explaining and forecasting inflation. The empirical results can be summarized as follows. First, investor attention is the Granger cause of the inflation rate and has a negative impact on inflation. Second, predictive models that incorporate investor attention can significantly outperform the commonly used benchmark models in inflation forecasting for both short and long horizons. Third, the robustness checks show that updating investor attention or the model specification does not change the conclusion of the crucial role of investor attention in explaining and forecasting inflation. Finally, this paper proves that investor attention influences inflation through inflation expectations. In summary, this paper demonstrates the importance of investor attention for macroeconomics, as investor attention affects inflation.