Book Description

This study analyzes data from survey questions which obtain both (1) inflationary expectations in continuous numerical terms for the coming 12 months from a survey sample and (2) the subjects' perceptions of what inflation had been over the previous 12 months, again in continuous numerical terms. The data used here are for the period 1974 -77 when inflation reached unusually high levels due to energy shocks after two decades of relatively modest price change. This provides a unique opportunity to examine subjects in a period when they were adjusting to a dramatically changed price environment. The findings show a systematic basis towards over-estimation, or exaggeration, in perceived inflation rates which increases as actual inflation rates accelerate. As estimated from these data, perceptions of inflation are found to approach their most accurate level when actual inflation is at its lowest level, which was 4.2% in that period. Even in this case, the exaggeration factor was 2.16. Perceived rates of inflation for specific expenditure categories were also studied for a subsample and again showed substantial over-estimation, but with the same rank ordering as actual rates of inflation for the categories. Finally, we use the data on perceived as well as expected rates of inflation from the same sample to fit both the adaptive and the extrapolative models of price expectations. The adaptive expectations model is also fitted with the actual rather than perceived rate of inflation utilizing a panel component of our initial survey sample. The use of perceived rates is found to be superior in fitting this model. Socioeconomic variables are also examined, and mostly notably, women are found to have significantly greater over-perceptions of inflation than men.