Inflation Expectations and Household Spending in High Inflation: Evidence from a Randomized Control Trial

General publicly available information on inflation forecasts

Each group consists of approximately 640 observations. Basic demographic and socioeconomic questions were asked prior to the treatment. Each group received one of the following statements:

Treatment 1: The annual inflation rate in the last year is 65%. This means that, on average, prices have increased by 65% in the last year.

Treatment 2: According to professional forecasts, the annual inflation rate at the end of the next 12 months will be 38%. This means that professionals expect prices to increase by an average of 38% over the next 12 months.

Treatment 3: According to professional forecasts, the annual inflation rate at the end of the next 12 months will be 38%. This means that professionals expect prices to increase by an average of 38% over the next 12 months. Additionally, professionals indicate there is uncertainty about the inflation rate. The lowest (optimistic) inflation estimates are 30%, while the highest (pessimistic) estimates are 48\%.

Treatment 4: According to household forecasts, the annual inflation rate at the end of the next 12 months will be 75%. This means that households expect prices to increase by an average of 75% over the next 12 months. Additionally, households are experiencing uncertainty about the inflation rate. The lowest (optimistic) inflation estimates are 40%, while the highest (pessimistic) estimates are 100%.

After the information treatment stage (with no treatment for the control group), respondents were asked several follow-up questions to measure their posterior beliefs. These questions covered their inflation expectations, anticipated income growth, likelihood of purchasing various durable goods, and their expected percentage increase in both nominal total consumption and non-durable consumption over the next twelve months.

2024-05-01

2024-06-01

Households' Consumption Plans

The impact of inflation expectations on households' consumption plans

Households' Portfolio Allocation

The impact of inflation expectations on households' portfolio allocation

The survey was conducted face-to-face in May 2024 and collected information on a wide range of demographic and economic characteristics for a representative sample of households. The sample includes 3,200 households, with random sub-groups of respondents receiving different information treatments, alongside a control group that did not receive any additional information. The treatments consist of publicly available information, focusing on forecasts from professionals and households, as well as past inflation data. The goal is to generate exogenous variation in inflation expectations to understand the causal impact of these expectations on relevant economic outcomes.

We implement a survey of Turkish households in which random subsets of respondents receive information about publicly available inflation expectations. The resulting exogenously generated variation in inflation expectations is used to assess how expectations affect households' consumption plans relative to those in a control group.

After the information treatment stage (with no treatment for the control group), respondents were asked several follow-up questions to measure their posterior beliefs. These questions covered their inflation expectations, anticipated income growth, likelihood of purchasing various durable goods, and their expected percentage increase in both nominal total consumption and non-durable consumption over the next twelve months. Additionally, we included a hypothetical question on how they would allocate an unexpected 100,000 TL (approximately six times the minimum wage) lottery prize between consumption and savings, with a list of available saving vehicles provided. Finally, we inquired about their perceptions regarding whether it is a good time to buy real estate, a car, or other durable goods, as well as their views on access to credit and their level of trust in the country's official statistical institute.

Randomization by computer.

Individuals (households)

No

~3200

~3200

640

We implement a survey of Dutch households in which random subsets of respondents receive information about inflation. The resulting exogenously generated variation in inflation expectations is used to assess how expectations affect consumption decisions. The causal effects of reduced inflation expectations on nondurable spending are imprecisely estimated, but there is a sharp positive effect on durable spending. This is likely driven by the fact that Dutch households seem to become more optimistic about their real income and aggregate spending when they decrease their inflation expectations. We find little role for cognitive or financial constraints in explaining spending responses.

Coibion, Olivier, Dimitris Georgarakos, Yuriy Gorodnichenko, and Maarten van Rooij. 2023. "How Does Consumption Respond to News about Inflation? Field Evidence from a Randomized Control Trial." American Economic Journal: Macroeconomics, 15 (3): 109–52.

https://www.aeaweb.org/articles?id=10.1257/mac.20200445

We use randomized treatments that provide different types of information about the first and/or second moments of future economic growth to generate exogenous changes in the perceived macroeconomic uncertainty of treated households. The effects on their spending decisions relative to an untreated control group are measured in follow-up surveys. Our results indicate that, after taking into account first moments, higher macroeconomic uncertainty induces households to significantly and persistently reduce their total monthly spending in subsequent months. Changes in spending are broad based across spending categories and apply to larger durable good purchases as well.

Coibion, Olivier, Dimitris Georgarakos, Yuriy Gorodnichenko, Geoff Kenny, and Michael Weber. 2024. "The Effect of Macroeconomic Uncertainty on Household Spending." American Economic Review, 114 (3): 645–77.

https://www.aeaweb.org/articles?id=10.1257/aer.20221167&from=f

We conducted a survey of Turkish firms, using randomized treatments to provide varied information about inflation in a high-inflation environment. By matching the survey data with detailed firm-level data on exports, employment, credit, and foreign exchange transactions, we explore the impact of exogenous variations in inflation expectations on firms' behavior, borrowing decisions, and expectations. Our findings reveal three key insights. First, inflation expectations significantly impact firms' expected prices, wages, and unit costs, with pass-through rates reaching as high as 60% in a high-inflation environment—demonstrating a much stronger connection compared to low-inflation settings. Second, firms with heightened inflation expectations substantially increase their credit demand, shifting from short-term to long-term loans through the refinancing channel, with a significantly reduced cost. Specifically, a 10 percentage point increase in inflation expectations leads to a 3 percentage point rise in credit usage, accompanied by a 3 percentage point decline in borrowing costs. Additionally, firms with elevated inflation expectations are more likely to raise their foreign currency purchases while decreasing the share of FX-denominated credit on their liability side. Third, firms facing higher inflation expectations tend to reduce employment and sales, reflecting a stagflationary outlook. Despite the negative impact on sales and employment, total credit usage increases, driven by long-term borrowing as firms seek to lock in lower long-term rates in anticipation of further inflation, highlighting the importance of the refinancing channel.

Akarsu, Okan and Aktug, Emrehan and Torun, Huzeyfe, Inflation Expectations and Firms' Decisions in High Inflation: Evidence from a Randomized Control Trial (October 01, 2024). Available at SSRN: https://ssrn.com/abstract=5008981 or http://dx.doi.org/10.2139/ssrn.5008981

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5008981