Research

I present a novel perspective and analytical approach to a long-standing debate: the relationship between inflation expectations and household consumption and savings behavior. A fundamental component of such behavior, households’ inflation expectations remain a closely watched, yet little understood trend, one for which economic research continues producing inconsistent, at times conflicting, results. Despite some recognitions of the cyclicity in such trends, there has been little formal research into the cyclical nature of this expectations-behavior relationship. As such, to seek these possible cyclical natures, I explore an approach known as wavelet analysis. Wavelet analysis allows me to examine series in both the time and frequency (i.e. cyclical) domains. I apply this technique to US inflation expectations, nondurables and durables personal consumption, and personal savings data over a long period of time, from 1978 to 2024. Through the new perspective provided by the frequency domain, I show how the often-inconsistent aggregate relationships between expectations and consumption and savings behavior in macroeconomic data may in fact be consistent, the very result of the series’ multi-scale cyclical natures.

We conduct an online experiment to assess the validity of the survey-based methods used by central banks and in macroeconomic research to measure inflation perceptions and expectations as well as test dynamic financial education interventions to improve household consumers’ decision-making in inflationary conditions. Employing the intertemporal savings and consumption task known as the Savings Game (Lawrence et al., n.d.), we test how well survey-based measures of inflation internalization (i.e. perceptions and expectations) correlate with and ultimately predict consumers’ behavior when facing inflation. We also confirm the primary individual characteristics that relate to better adaptability and performance in the Savings Game. Further, considering the lack of impact generic financial education treatments have on subjects’ in-task performance, we test how dynamic, personalized feedback and guidance impacts behavior. We find strong evidence confirming that survey methods provide valid measures, which indeed correlate with behavior (particularly qualitative internalizations); that subjects’ numerical abilities, consistency of economic decision-making, and general adaptability are the primary individual-characteristic indicators of performance; and that treatments with dynamic, personalized feedback coupled with straightforward and actionable recommendations do improve subjects’ decision-making and performance.

We experimentally analyze the impact of inflation on individuals’ savings and consumption behavior as a means of linking their perceptions and expectations of inflation to their savings-consumption behavior at the individual level. Through an online experiment, we distinguish the underlying situational and personal factors that correlate with people’s adaptability to changes in inflationary conditions, observe people’s savings and consumption decision-making processes, and determine whether an intervention can improve their decisions and adaptability in such changing conditions. We develop a novel experimental task that simulates households’ inflationary experience and compare subjects’ performance to a benchmark best strategy to measure individual adaptability. To explore the individual determinants of these recognition and adaptation abilities, we collect a series of additional behavioral measures and correlate these individual characteristics to task performance. Ultimately, we find that individuals demonstrating greater numeracy perform best in changing inflationary conditions as well as respond best to our financial-education intervention, whereas subjects with the most inconsistent economic preferences perform significantly worse on both counts.