US consumers may be listening more to Fed comms, researchers say

US consumers are growing more attentive to inflation, according to researchers using data from a survey conducted by the Federal Reserve of Cleveland.

Because of this, it’s possible that “their expectations are more informative, likely to be less sticky, and so should be tracked closely by policymakers”, said the researchers, Hana Braitsch and James Mitchell. Consumers are more likely to believe US inflation will fall if they are more attentive to questions asked in the survey, the researchers found.

“Increased public attentiveness also suggests that the public may now be better attuned to central bank communications,” the researchers said. “Targeted and new forms of communication may be needed, however, to reach the inattentive consumers to encourage them to moderate their inflationary expectations.”

The Federal Reserve Bank of Cleveland asked around 100 Americans everyday questions about Covid and the economy since the onset of the pandemic. Two questions concerned inflation – consumers were asked to project inflation one year out in a single number, then to give probabilities to different ranges of inflation in one year. One of those ranges would include their previous guess.

The researchers then measured how consistent the participants’ probabilities were with their first answer.

The authors said respondents who answered consistently were more attentive. “Attentiveness has risen over time since the start of the pandemic,” said the authors, “albeit with some volatility and a leveling out around a higher mean over the course of 2022”.

Inflation expectations from both attentive and inattentive survey respondents rose over time.

The authors said the Fed may needs to adopt “targeted and highly visible communication strategies” to reach inattentive consumers. Inattentive consumers, they said, still influence inflation through their spending whether they’re consistent in their views or not.

“The attentive consumers believe that inflationary pressures are considerably less acute than do the inattentive consumers,” said the authors. “Importantly, from the perspective of users of inflationary expectations data, the year-ahead forecasts averaged across attentive consumers look quite different from those of inattentive consumers,” they said.

The researchers made clear that “only time will tell” if inattentive or attentive consumers are more accurate gauges of future inflation.

“We would expect inflationary expectations from more attentive consumers to be better informed and therefore to offer more accurate forecasts of future inflation than those from inattentive consumers,” they said. “Based on our new metric, men, older people, and those with higher education degrees are most attentive.

“Somewhat of a puzzle is the finding that based on our measure women are less attentive than men when it comes to inflation expectations,” they said

The researchers said the consumer price index’s volatility was statistically significant as a factor affecting consumers’ attentiveness. But it was a “much weaker” predictor of their attentiveness than increases in vehicle fuel prices, said the authors.

“It seems noteworthy that these rises, falls, and subsequent leveling out of attentiveness around a higher mean appear to correlate in particular with gas price inflation,” said the researchers.

Consumers have the real and recurring experience of checking vehicle fuel prices, whereas the CPI is a more abstract measure, the researchers said.

“Inattentive respondents on average forecast much higher inflation,” said the authors, despite expectations from both groups rising “steadily and consistently”.

Professional forecasters seem to “do the reverse” of inattentive consumers, said the researchers, being more likely to predict relatively low levels of inflation, whereas inattentive consumers do the opposite.