[Job Market Paper] Do Household Inflation Expectations Respond to Macroeconomic Data Releases?
[Job Market Paper] Do Household Inflation Expectations Respond to Macroeconomic Data Releases?
This paper investigates how household inflation expectations respond to macroeconomic data releases. By utilizing an unexploited feature of the Michigan Survey of Consumers (MSC) -- the interview dates of each respondent between June 1979 and May 2019 -- I identify whether respondent expectations differ within tight windows around data releases. I consider 480 monthly releases of the Employment Situation Summary (ESS), Consumer Price Index (CPI), Industrial Production (IP), and Gross Domestic Product (GDP), as well as 459 Federal Open Market Committee (FOMC) meetings/calls. I find that household inflation expectations significantly respond to information about the unemployment rate and CPI inflation, suggesting salience of these variables for households relative to others considered. This includes the size and sign of the data release relative to the previous period data release. With 40 years of interviews, this paper also addresses whether the relevance of these releases differs during recessions. I find that information about the unemployment rate is particularly salient preceding, during, and following recessions. For a shorter subsample, this paper concludes with whether deviations in these releases from market expectations, as measured by the Bloomberg consensus forecasts, prompts adjustment. I find that household inflation expectations respond to deviations in IP and real GDP growth, indicating that unanticipated changes in output growth are relevant.
Also available on SSRN
Abstract: I find evidence that monetary policy shocks have very little effect on consumer sentiment, even when conditioning on states of inflation, business cycles, and interest rates. However, I do find evidence that the state of consumer sentiment does matter for the propagation of monetary policy shocks to output, inflation, and unemployment. Specifically, positive interest rate shocks during periods of depressed consumer sentiment have quicker and more contractionary effects on output and unemployment, while inflation is not responsive over short nor long term horizons.
While preliminary, I am working on a guide to constructing and using the interview dates of MSC respondents that are utilized in my job market paper. My intent is to increase the accessibility of these interview dates for future researchers. If you're interested in knowing more while this guide is being written, please feel free to each out via email.