Reading consumers’ minds: an analysis of inflation expectations

Abstract

ABSTRACT The heterogeneity in households’ consumption baskets is often deemed responsible for deviation of their inflation expectations from headline inflation. The paper verifies this by simulating population baskets and estimating mean inflation by sampling baskets. The estimated mean inflation fails to display closeness with survey numbers. Therefore, the paper proposes alternative logical methods for designing basket compositions and identifies the most suited method using which the estimated expectations are found to be close to and well-correlated with survey numbers. The findings suggest that a sudden rise in inflation of regular-use items can explain the deviation in households’ expectations from official inflation.