Expectations about future prices play a crucial role in shaping consumer behavior, financial decisions, and overall economic sentiment. Understanding how individuals form these expectations is essential for assessing the effectiveness of monetary policy and the responsiveness of the public to macroeconomic signals. Individuals' expectations of the evolving inflation rates are often shaped by a complex set of socioeconomic factors, including income, education, political affiliation, and exposure to economic information, as well as by personal experiences with inflation, housing costs, energy prices, and more.
This research aims to expand on the existing literature by investigating how different socioeconomic factors affect individuals' predictions of future inflation rates in the United States. The goal is to understand how variables such as income, social hierarchy, demographics, and education - shape how different demographics interpret changes in the price level. Women tend to have higher inflation expectations than men due to greater exposure of volatile prices, through tasks such as grocery shopping. Similarly, Democrats may believe inflation expectations to be higher while a Democratic candidate is serving in office. A lower income citizen may anticipate higher short term inflation rates as they spend a large portion of their income on necessities such as food, housing, and electricity. Finally, wealthier families may expect lower inflation rates as they have more financial flexibility, which strengthens them during times of high inflation.
By analyzing how these diverse socioeconomic factors contribute to differences in inflation rate expectations, this study seeks to provide a more nuanced understanding of the formation of economic beliefs among consumers. Using survey and macroeconomic data from the University of Michigan Survey of Consumers (SoC), this study will empirically examine the relationships between socioeconomic indicators and inflation rate predictions. Expected inflation will serve as the dependent variable, while key explanatory variables, including actual inflation, and other social and demographic characteristics will explain how consumers form their inflation expectations.