Working Paper Revision

Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation

Abstract: We implement a novel methodology to disentangle two-way causality in inflation and income expectations in a large, nationally representative survey of US consumers. We find a 20 percent passthrough from expected inflation to expected income growth, but no statistically significant effect in the other direction. Passthrough is higher for higher-income individuals and men. Higher inflation expectations increase consumers’ likelihood to search for higher-paying new jobs. In a calibrated search-and-matching model, dampened responses of wages to demand and supply shocks translate into greater output fluctuations. The survey results and model analysis provide a labor market channel for why people dislike inflation.

Keywords: inflation; wage-price spiral; expectations; randomized controlled trial;

JEL Classification: C83; E24; E31; E71;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2023-03-27

Number: 22-21R

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