Peer influence and inflation expectations: Evidence from households’ social comparisons

Abstract

This paper investigates how personal income changes and social comparisons shape inflation expectations among Indian households, using an ad hoc household survey and data from the Reserve Bank of India’s Consumer Confidence Survey. In line with the literature, we find that a decrease in income leads to higher expectations because of increased financial constraint. But we also find a novel pattern: households whose income increases also report higher inflation expectations. This is attributed to aspirational goals and social comparisons that households indulge in. Households wish to be relatively better off compared to their peers, and the inability to improve their relative position is attributed to external factors such as higher inflation. Our findings reveal a previously overlooked behavioral channel in expectation formation and contribute to understanding heterogeneity in household macroeconomic beliefs. It also highlights how social comparison and inequality can impact inflation levels in the economy through inflation expectations.