Demographic Differences in Inflation Expectations: What Do They Really Mean?
Meyer, Brent, Venkatu, Guhan, Economic Commentary (Cleveland)
It has often been reported that different demographic groups show persistent differences in their inflation expectations. Some reasonable explanations have been suggested, but most have failed to fully explain these apparent differences. We argue that the demographic differences have been overstated by using the mean to describe differences across demographic groups. When we use the median to describe inflation expectations, we find little meaningful difference across demographic groups.
Most macroeconomists have come to believe that infl ation expectations are a key determinant of actual infl ation. This clearly has important implications for policymakers. As Federal Reserve System Chairman Ben Bernanke observed in 2004, ". . . an essential prerequisite to controlling infl ation is controlling infl ation expectations." Consequently, monitoring and measuring the public's infl ation expectations is of enormous importance to the monetary authority.
There are several ways to measure these expectations. They can be inferred from fi nancial instruments or modeled more explicitly. But the most straightforward way to assess the public's expectations on infl ation is to simply ask American households.
Unfortunately, survey measures of the public's infl ation expectations tend to generate responses that appear at odds with actual experience. And systematic differences across demographic groups that aren't easily explained by economic factors have led some to wonder whether these surveys are actually providing meaningful information on infl ation expectations to policymakers.
However, we argue that these demographic differences have been overstated by previous research, and that by measuring average infl ation expectations in a particular way, we can see that these survey measures are indeed informative, whether for a given demographic group or across an entire survey.
Different Groups, Different Infl ation Expectations?
The University of Michigan conducts one of the longest-running surveys of American households. Each month, a minimum of 500 interviews are conducted by phone, with samples designed to be representative of all American households, excluding those in Alaska and Hawaii. These monthly surveys contain approximately 50 core questions, each of which tracks a different aspect of consumer attitudes and expectations. Regarding expectations of infl ation, the following question has been asked of survey participants since the early 1980s:
"During the next 12 months, do you think that prices in general will go up, or go down, or stay where they are now?"
One of the odd aspects of the responses to this question is that different demographic groups seem to show persistent differences in their infl ation expectations, even after adjusting for economically relevant factors.
It isn't necessarily surprising that households have a range of infl ation expectations. After all, households can have different infl ation experiences, depending on the things they buy (their "market basket"). In fact, one recent study showed that these differences can be considerable-as much as 1 to 3 percentage points per year. However, the average differences in infl ation experiences across groups-less than half a percentage point at most annually-turn out to be notably smaller than the differences in groups' infl ation expectations. Market-basket differences, then, don't seem adequate to explain the differences in infl ation expectations that we observe across groups.
An illustration of these differences can be seen with gender. If we adjust for race and education by restricting our comparison to white, college-educated individuals, women's infl ation expectations remain consistently higher than men's throughout the last decade (fi gure 1).
Previous studies show similar patterns. A study by Mike Bryan and Guhan Venkatu shows a persistent gap for an earlier period, after trying to control for differences in income and marital status; and a study using infl ation perceptions data from Swedish households in 1977 documents a difference between men and women, also after adjusting the groups to make them more similar. …