Inflation Expectations and Consumption: Evidence from 1951

Abstract

We use rich microdata from the 1951 Survey of Consumer Finances to study inflation expectations and consumption in the United States around the start of the Korean War. At the time, the Treasury required the Federal Reserve to hold nominal interest rates constant, so increases in expected inflation corresponded to reductions in the ex-ante real interest rate (similar to a zero lower bound episode). The survey data includes measures of respondents' actual spending on durables, cars, and homes in 1950, and expected expenditures in these categories in 1951, at both the extensive and intensive margins. The data also includes detailed income and asset data from which we can infer respondents' total consumption in 1950. We find that durables consumption and total consumption in 1950 increase with expected inflation, while expected consumption in 1951 of durables, cars, and homes decreases (though only statistically significantly for cars). Our results are consistent with consumers shifting consumption forward intertemporally in response to lower real interest rates.