Abstract
Using a novel experimental setup, we study the direction of causality between consumers' inflation expectations and their income growth expectations. In a large, nationally representative survey of U.S. consumers, we find that the rate of passthrough from expected inflation to expected income growth is incomplete, on the order of 20%. There is no statistically significant effect going in the other direction. Passthrough varies systematically with demographic and socio-economic factors, with greater passthrough for higher-income individuals than lower-income individuals, although it is still incomplete. Higher inflation expectations also cause consumers to report a higher probability that they will search for a new job that pays more. Using our survey findings to calibrate a search-and-matching model, we find that dampened responses of real wages to demand and supply shocks translate into greater fluctuations in output. Taken together, the survey results and model exercises provide a labor market channel to explain why people dislike inflation.
Includes bibliographical references (pages 42-44).