The influence of supermarket prices on consumer inflation expectations

Using data on the inflation expectations of 85 thousand consumers and a unique data set of price changes at Australian supermarkets, we show that consumers form inflation expectations that are excessively influenced by particular elements of the cross-sectional distribution of price changes. The estimates provide novel evidence that the right tail of supermarket price changes, which has largely been ignored in the literature to date, is a material factor in explaining inflation expectations. The right tail of supermarket price changes materially raises inflation expectations, particularly for lower income households, leading to the presence of income-dependence in the expectation formation process. The results shed new light on the informativeness of cross-sectional supermarket price changes for consumer beliefs about inflation.