ABSTRACT
This chapter discusses how households form subjective expectations about inflation and how they use these expectations in their economic decision-making. On average, households’ inflation expectations are biased upward relative to ex post realizations. They vary substantially in the cross-section, and demographic characteristics such as cognitive abilities contribute to explaining this variation. Moreover, the inflation on goods frequently purchased by households, such as milk or eggs, helps explain both the time-series and cross-sectional variation in households’ inflation expectations. Turning to economic choices, the chapter discusses recent research in settings where both expectations and choices are observed jointly for the same individuals. This literature suggests that subjective inflation expectations are an economically important determinant of individual consumption, investment, and savings choices. The chapter concludes with an outlook on the fast-growing literature on subjective inflation expectations and discusses several open questions in this area.
