A note on the impact of news on US household inflation expectations

TL;DR

This paper examines how news about inflation and monetary policy influences US household inflation expectations from 1978 to 2016, highlighting asymmetric effects and the role of sentiment during the lower bound period.

Contribution

It provides new insights into the asymmetric impact of monetary news on household inflation expectations and the influence of sentiment during the lower bound period.

Findings

News on rising inflation and easier monetary policy has a stronger impact than news on lowering inflation.

Monetary policy news affects expectations through consumer sentiment, especially during the lower bound period.

The impact remains significant after controlling for personal characteristics and perceptions.

Abstract

Monthly disaggregated US data from 1978 to 2016 reveals that exposure to news on inflation and monetary policy helps to explain inflation expectations. This remains true when controlling for household personal characteristics, perceptions of government policy effectiveness, future interest rates and unemployment expectations, and sentiment. We find an asymmetric impact of news on inflation and monetary policy after 1983, with news on rising inflation and easier monetary policy having a stronger effect in comparison to news on lowering inflation and tightening monetary policy. Our results indicate the impact on inflation expectations of monetary policy news manifested through consumer sentiment during the lower bound period.