Higher inflation expectations can cut consumption – research

Shocks that increase consumers’ inflation expectations may cause them to cut their spending, in contrast to standard theoretical predictions, researchers have found.

Olivier Coibion, Dimitris Georgarakos, Yuriy Gorodnichenko and Maarten van Rooij note in their working paper that central banks’ forward guidance, designed to increase inflation expectations, can have “very large effects” in theoretical models, but evidence from actual policy decisions “suggests modest effects at best”. Some have