Understanding Consumer Inflation Expectations during the COVID‐19 Pandemic

• Published date: 01 March 2022
• Author: Gunda‐Alexandra Detmers,Sui‐Jade Ho,Özer Karagedikli
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/1467-8462.12460

The Australian Economic Review, vol. 55, no. 1, pp. 141–154DOI: 10.1111/1467-8462.12460

Understanding Consumer Inflation Expectations during the

COVID‐19 Pandemic

Gunda‐Alexandra Detmers, Sui‐Jade Ho and Özer Karagedikli*

Abstract

We study how individuals' formation of

inflation expectations are affected by the

stringent containment and economic support

measures put in place during the COVID‐19

pandemic. Using the New York Fed Survey of

Consumer Expectations (SCE) and the Oxford

COVID‐19 Government Response Tracker

(OxCGRT), we find that policies aimed at

containing the pandemic lead to an increase

in individuals' inflation expectations and

inflation uncertainty. We also find some

heterogeneity in the impact across different

demographic groups.

JEL CLASSIFICATION

J31; J64

1. Introduction

Inflation expectations play a major role in

many decisions by households and firms, such

as consumption, wage bargaining and price

setting. Consequently, they serve as a key

input for central banks in their assessments of

inflation risks, as de‐anchored expectations

might result in a persistent rise in prices. This

involves the distinction between short‐lived

spikes and persistent deviations and is espe-

cially relevant during periods of stress (such

as financial, economic or even health crises)

when policy‐makers need to make decisions

amid unclear economic signals.

At the time of writing, the COVID‐19

pandemic continues to pose a threat to a

sustained economic recovery in many econo-

mies. The response of authorities, for example,

in the United States, included instituting

stringent containment and health measures, as

well as economic support measures. This paper

aims to examine the impact of these various

government measures on the formation of

consumers' inflation expectations. Have these

policies helped anchor inflation expectations,

or have they instead contributed to a rise in

inflation expectations or inflation uncertainty?

Answering these questions will provide in-

sights into how expectations are formed in a

crisis.

We investigate the behavior of the US

inflation expectations, namely the Federal

Reserve Bank of New York's Survey of

Consumer Expectations (SCE), through

February 2021 by using the Oxford

* Detmers:TechnischeUniversitätDresden,Dresden

01062, Germany; Ho: Bank Negara Malaysia, Kuala

Lumpur 50480, Malaysia; Karagedikli, Asia School of

Business, Kuala Lumpur 50480, Malaysia; Centre for

Applied Macroeconomic Analysis (CAMA), Canberra

2600, Australia; University of Marburg, Marburg 35037,

Germany. Corresponding authors: Detmers,email <gunda-

alexandra.detmers@tu-dresden.de>; Ho, email <jade@

bnm.gov.my>;Karagedikli,email<ozer.karagedikli@

asb.edu.my>.

We are grateful for helpful comments from Christian

Leßmann and seminar participants at the Technische

Universität Dresden. The views expressed here are the

views of the authors and do not necessarily represent

the views of Bank Negara Malaysia.

© 2022 The Authors. The Australian Economic Review published by John Wiley & Sons Australia, Ltd on behalf of The University of

Melbourne, Melbourne Institute: Applied Economic & Social Research, Faculty of Business and Economics

This is an open access article under the terms of the Creative Commons Attribution‐NonCommercial‐NoDerivs License, which

permits use and distribution in any medium, provided the original work is properly cited, the use is non‐commercial and no

modifications or adaptations are made.