What determines households inflation expectations? Theory and evidence from a household survey

The purpose of the present paper is to study how households form inflation expectations. Using a novel survey dataset of Italian households’ opinions of inflation, we investigate two separate, but related, types of behaviour: ‘inattentiveness’ and ‘anchoring’. The present analysis extends the existing literature by incorporating explicitly inflation targets and distinguishing between aggregate and disaggregate dynamics based on demographic groups. We also extend the literature by considering both the short- and long-run dynamics as households update their inflation expectations and accounting for their state-varying behaviour. All these issues provide important insights into understanding actual inflation dynamics and the conduct of monetary policy.