When consumers expect higher inflation ahead, they become more willing to spend on the spot, according to new research from the University of Chicago Booth School of Business.
"Central banks around the world try to raise inflation expectations via unconventional monetary policy measures to increase spending. The bond-buying program of the European Central Bank is the most recent example in a long line," Chicago Booth Professor Michael Weber says.
In their paper "Inflation Expectations and Consumption Expenditure," Weber and co-authors Francesco D'Acunto of the Haas School of Business, and Daniel Hoang of the Karlsruhe Institute of Technology use German household survey data collected from 2000 to 2013 by research firm GfK. They found that households expecting an increase in inflation were more likely to spend on consumer durable goods -- like automobiles, electronics and other household goods.
In other words, consumers will buy more because money saved would be less valuable -- higher inflation would reduce real interest rates if nominal rates are left the same -- and durable goods would cost comparatively less.
Although this mechanism is the cornerstone of several macroeconomic theories, and hotly debated in policy circles, direct empirical evidence was missing.
"Measuring inflation expectations of households and their buying intentions has proven difficult. The novel data in our study have several unique advantages in survey design which allow us to tackle the question," Weber says.
The association between inflation expectations and purchasing behavior is stronger for survey participants with a college degree, for urban households, and for high-income households. The heterogeneity across demographic groups suggests that some households might not fully understand the aims of policy changes. Weber, D'Acunto and Hoang say increased policy transparency and higher financial literacy could help households understand the implications of monetary and fiscal policies and hinder unintended consequences such as the redistribution of wealth.
The report can be found online at: http://faculty.chicagobooth.edu/michael.weber/research/pdf/inflationExpectations.pdf
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