How Economic Crises Affect Inflation Beliefs: Evidence from the Covid-19 Pandemic

This paper studies how inflation beliefs reported in the New York Fed's Survey of Consumer Expectations have evolved over the first six months of the Covid-19 pandemic. We find that household inflation expectations responded slowly and mostly at the short-term horizon. In contrast, the data reveal immediate and unprecedented increases in individual inflation uncertainty and in inflation disagreement across respondents. Consistent with precautionary saving, the rise in inflation uncertainty is shown to be associated with how respondents used the stimulus checks they received as part of the 2020 CARES Act. We also find evidence of a strong polarization in inflation beliefs and we identify differences across demographic groups.