Gauging inflation aversion through the lens of consumer sentiment

Abstract

We propose using the relationship between individual consumer sentiment and inflation expectations as a dynamic proxy for inflation aversion. We find a robust negative association between consumer sentiment and their own inflation expectations, especially during times of low inflation. This relationship holds when comparing the same individual’s sentiment and inflation expectations over time, suggesting a genuine inflation aversion. Our proposed metric indicates that, after the U.S. central bank adopted a 2-percent inflation target, consumers continued to be more averse to expectations of 2-percent than zero inflation.