Time to Shop Until Inflation Drops: The Effect of Inflation on Household Shopping Behavior
Abstract: I study how households adapt their shopping behavior when inflation rises. Using transaction-level panel data from 2021–2023, I construct household-specific inflation rates and estimate their causal effects on shopping intensity and bargain-hunting. Higher inflation leads to more shopping trips, greater retailer diversification, and increased reliance on sales and coupons. Responses vary systematically with household characteristics: higher-income households and those with unemployed members respond more strongly, while households whose wages keep pace with inflation respond less. While these adjustments helped households absorb part of the price shock, they imposed substantial time costs. I estimate the time burden from this increased trip frequency using data from the American Time Use Survey, estimating approximately $600 per household per year for each percentage point of sustained inflation. Despite the prominence of search costs in theoretical models of inflation, causal empirical evidence on inflation-induced search behavior has been limited. I provide this evidence by exploiting household-level variation in inflation exposure and show that these behavioral costs are quantitatively important.
During the early part of the Great Inflation (1965-1975), the Federal Reserve undertook even-keel operations to assist the US Treasury’s coupon security sales. Accordingly, the central bank delayed any tightening of monetary policy and permanently injected reserves into the banking system. Using real-time Taylor-type and McCallum-like reaction functions, we show that the Fed routinely undertook these operations only when it was otherwise tightening monetary policy. Using a quantity-equation framework, we show that the Federal Reserve’s even-keel actions added approximately one percentage point to the overall 5.1 percent average annual inflation rate over these years.
As part of its framework review in 2020, the Federal Reserve (Fed) announced its intent to switch to average inflation targeting (AIT) rather than inflation targeting (IT). In the context of a textbook New Keynesian model, we review some of the properties of AIT. We then estimate interest rate reaction functions pre- and post-2020. Pre-2020, Fed policy is well approximated by a conventional Taylor-type rule that reacts to period inflation. Post-2020, the Fed appears to have reacted strongly to average inflation and not to period inflation, in line with the stated framework. We conclude with a discussion about whether the policy switch might have contributed to the high inflation of the early 2020s.
Inflation and Job Search under Wage Indexation: Evidence from Europe
with Laura Pilossoph and Jane Ryngaert
Abstract
This paper estimates the relationship between inflation expectations and on-the-job search in Europe. Using a model where workers can choose their job search effort based on their current inflation expectation, we find that the higher the degree and frequency of automatic inflation-based wage adjustment workers face, the less likely they are to search for better outside wage offers. We test these model predictions empirically using data from the European Central Bank’s Consumer Expectations Survey. In accordance with our model, we find that in countries with robust union membership or that have explicit policies linking wages to inflation, workers’ inflation expectations do not predict job-search decisions. This is in contrast to an environment with less bargaining and wage indexation, like the United States. Our findings suggest that institutional factors that effectively preserve real wages can play an important role in how inflation expectations pass through to the labor market.
What to Expect When You Expect You Won't Be Expecting: Conceptions and Business Cycles
Residual Seasonality in GDP Growth Remains after Latest BEA Improvements
with Kurt G. Lunsford
Federal Reserve Bank of Cleveland Economic Commentary, Number 2019-05.