Research Discussion Paper – RDP 2024-07 How Do Households Form Inflation and Wage Expectations?

This paper explores the formation of households' wage and inflation expectations using a common dataset and framework, documenting a number of stylised facts. We find that households tend to form wage and inflation expectations somewhat differently. Households associate higher wages growth with good economic outcomes, but higher inflation with worse economic outcomes. Wages expectations also tend to be somewhat more forward looking, while inflation expectations are more backward looking, especially for lower income households, and place a disproportionate weight on past fuel prices. These findings paint a picture of households having a somewhat 'supply-side' view of inflation, where shocks that push up inflation also weaken the economy, but a more 'demand-side' view of wages, where shocks that push up wages also strengthen the economy, which may make communication of monetary policy and the outlook more challenging.