Partisan Perspectives on Inflation: Exploring Bias in Economic Expectations

Abstract

Inflation expectations are important determinants of future inflation and individual consumer behavior. Recent attention has been devoted to individual-level heterogeneity in inflation expectations. I consider political partisanship as a source of heterogeneity and question whether expectations are biased by partisanship. I find that they are, i.e., that individuals from the president’s political party expect lower inflation relative to members of the opposing party (this difference is statistically insignificant during the Bush presidency), and that this result cannot be explained by additional sources of heterogeneity. I also examine whether belonging to the president’s political party affects the rationality of expectations and find, first, that individuals from the president’s political party base their expectations more closely on CPI relative to the opposing party (although this difference is too small to be statistically distinguishable during the Bush and Biden administrations), and second, that members of the president’s party have more accurate expectations.