Michal Marencak, opens an external URL in a new window (National Bank of Slovakia)
This paper presents two novel findings on household inflation expectations during periods of high and low inflation. First, the impact of inflation expectations on durable consumption varies over time and depends on the expected inflation regime. Anticipating rising inflation relative to positive inflation enhances the readiness to spend on durables during periods of surging inflation but not during deflationary times. Moreover, the absence of explicit inflation expectations reduces consumption propensity, particularly during times of surging inflation. Second, outside the stable inflation range (2-3%), individual expected inflation levels drive the variance of aggregate inflation expectations (intensive margin). However, it isthe anticipation of higher or positive inflation (extensive margin) that influences the willingness to consume. These findings suggest regime- and agent-specific Euler equations.