Research Summary
The report investigates the relationship between consumer sentiments, inflation expectations, and real asset ownership. It uses data from the University of Michigan Surveys of Consumers and the Survey of Consumer Expectations from the Federal Reserve Bank of New York. The study finds a significant negative correlation between consumer sentiment and inflation expectations. It also reveals that homeowners and stockowners are more sensitive to expected inflation than other consumers, challenging the idea that owning such assets provides a hedge against inflation.
Key Takeaways
Negative Correlation Between Consumer Sentiment and Inflation Expectations
- Significant negative association: The report finds a significant negative correlation between consumer sentiment and inflation expectations, even after controlling for prevailing inflation in the economy.
- Greater sensitivity among homeowners and stockowners: Homeowners and stockowners exhibit greater sensitivity to expected inflation compared to other consumers, contradicting the notion that owning such assets provides a hedge against inflation.
- Impact on monetary and economic policies: These findings have implications for monetary and economic policies, as well as the perceived effectiveness of real assets as an inflation hedge.
Homeowners’ Sentiments and Inflation Expectations
- Greater sensitivity: Homeowners’ sentiments are more sensitive to their inflation expectations, indicating rational inattentive behavior.
- Impact of mortgage debt: Homeowners with mortgage debt dislike inflation more than renters, indicating the redistribution effect of inflation on wealth.
- Revision of near-term inflation expectations: Homeowners are more likely than renters to revise down near-term inflation expectations in response to a rise in mortgage rates.
Stockowners’ Sentiments and Inflation Expectations
- Debate on effectiveness of stocks as a hedge: Real estate ownership is considered a hedge against inflation, while the effectiveness of stocks as a hedge remains debated.
- Impact on aggregate consumption: Homeowners and stock owners have a significant impact on aggregate consumption, making it important to understand how their sentiments react to inflation expectations.
- Sensitivity to fluctuations: Homeowners and stockowners’ sentiments are more sensitive to fluctuations in their own inflation expectations during a six-month period.
Impact of Inflation Expectations on Consumer Sentiments
- Negative effects: The analysis examines the effects of inflation expectations on consumer sentiments over different time periods, finding that the negative effects are more stable and statistically significant.
- Consistently negative effects: Both one- and five-year expectations have consistently negative effects on consumer sentiments, with the size of the coefficients increasing over the past three decades.
- Impact on various components of consumer sentiments: Homeowners and stockowners have a consistent negative relationship between inflation expectations and various components of consumer sentiments.
Demographic Factors and Consumer Sentiments
- Impact of demographic factors: Other control variables, such as gender, marital status, education, and income, also have an impact on consumer sentiments.
- Consistent relationship across demographic groups: The relationship between inflation expectations and consumer sentiments is consistent across different demographic groups, including age, education, and income.
- Control for demographic factors: Various demographic factors such as race, gender, marital status, education, and income were controlled for in the models.
Actionable Insights
- Understanding the sensitivity of asset owners: The report highlights the need to understand how the sentiments of real asset owners react to inflation expectations, as they account for the majority of aggregate income and consumption.
- Re-evaluating the effectiveness of real assets as an inflation hedge: The findings challenge the notion that owning real assets such as homes and stocks provides a hedge against inflation, suggesting a need for further investigation.
- Exploring the impact of inflation expectations on consumer sentiments: The report suggests that more research is needed to establish a causal relationship between sentiments and inflation expectations, which could lead to heterogeneous consumption and saving reactions.
