Inflation Expectation and Consumption: Evidence from CHFS Data

Abstract

Abstract—Engineering high inflation expectations has been proposed by economists and policymakers to stimulate consumption and GDP, especially when the nominal interest rate is approximately zero. This paper takes a close look at how individuals’ inflation expectation affects their readiness to spend. Households’ expectations about future economics affect their current consumption and there exists heterogeneous effect because of credit constraints. Using the cross-sectional data from China Household Finance Survey, we find that if households do not have credit constraints, those with positive inflation expectations spend 1437 RMB every year than those who expect the price level will stay the same or decrease. The effect of inflation expectations on consumption is insignificant for households with credit constraints. In addition, we further subdivide consumption into luxuries and necessities.