Expectations of Inflation: The Role of Demographic Variables, Expectation Formation, and Financial Literacy


  • The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York. We thank Michael Bryan, Jeff Dominitz, Eric Johnson, Arthur Kennickell, Chuck Manski, Athanasios Orphanides, Simon Potter, Robert Rich and Ken Wolpin for their advice on this project, as well as Sandy Chien, Tim Colvin, Daniel Forman, Peter Fielding, Daniel Greenwald, Tania Gutsche, Mandy Holbrook and Bas Weerman for their help with conducting the research.


When financial decisions have consequences beyond the immediate future, individuals' economic success may depend on their ability to forecast the rate of inflation. Higher inflation expectations have been reported by individuals who are female, poorer, single and less educated. Our results suggest that these demographic differences in inflation expectations may be partially explained by variations in expectation formation and financial literacy. Specifically, higher inflation expectations were reported by individuals who focused more on how to cover their future expenses and on prices they pay (rather than on the US inflation rate) and by individuals with lower financial literacy.