The years following the COVID-19 pandemic have seen dramatic rises in inflation in many countries, including the US. In new research Jenny Tang and Anat Bracha examine the link between changing inflation rates and the attention people pay to it, finding that when inflation is relatively low, consumers take little notice, but when it increases, there is greater awareness of the inflation rate. Surprise rises in inflation can also lead to expectations of higher inflation in the long term. Such trends may mean that the established relationship between inflation and employment weakens as inflation falls, potentially making the process of returning inflation to target, by slowing the labor market, grow progressively harder for central banks as inflation normalizes. 

Attention is a limited resource that affects what people see, hear, and consider. Attention is therefore key in determining people’s perception of the state of the economy. It affects their expectations about the future and, as a result, their economic decision making. While many economic theories start from a premise that all consumers are fully aware of the current economic situation, evidence has emerged showing that consumers are far from perfectly informed. In fact, new research shows that consumers’ attention varies—that they pay more attention when inflation rates are high. This attention–inflation relationship is important because consumers’ inclination to take notice when inflation is high can result in prices increasing even more rapidly. Such an attention–price spiral may occur when, for example, consumers spend more preemptively, before prices rise even higher (to avoid them), or when businesses feel that it is okay to raise prices because consumers expect them to do so.

Consumers’ inattention fluctuates over time 

Attention is important to study but is hard to measure—a lot like hearing and listening. Nevertheless, we found a novel way to measure consumers’ attention to inflation, or rather, their inattention. In each month starting in March 1982, we calculate the share of respondents to the Michigan Survey of Consumers who, when asked to estimate the then current inflation rate, acknowledged that they didn’t know what it was. We label this proxy for inattention as the “Don’t Know Share.”

As Figure 1 shows, consumers’ inattention has varied substantially over time. Before mid-2022, when this most recent bout of high inflation reached a peak, following decades of low and stable inflation, about 13 percent of respondents did not even venture a guess about the level of current inflation. However, once inflation soared to levels not seen since the 1980s in 2022, consumers’ inattention fell to levels also last seen in the 1980s. When inflation rose, consumers were more likely to be aware of it.

Figure 1 – Consumers’ attention to inflation 

Attention to inflation rises with the level of inflation 

Plotting the Don’t Know Share against inflation levels in the US in Figure 2, it is easy to see a consistent relationship: The Don’t Know Share has been high (that is, attention has been low) when inflation has been low, and it has been low (attention has been high) when inflation has been high. This pattern is not unique to the US as euro area data reveals the same relationship between inflation and consumers’ attention levels there.

Figure 2 – Inflation and attention, 1982 – 2021

Another way to determine whether consumers’ attention increases with the level of inflation is to see if they react more to information about inflation when it is high. Figure 3 shows our findings that when there is more media coverage about inflation in general, fewer consumers “don’t know” the level of inflation, but this effect is stronger when inflation is high. That is, individuals’ attention systematically changes with the level of inflation above and beyond any changes in the amount of news coverage.

Figure 3 – Inflation attention and media coverage

In addition to using the Don’t Know Share to measure consumer inattention, we looked at the responses of survey participants who did provide their estimates of current inflation. We find that the higher actual inflation is, the more people incorporated new information into their estimates. The results using this second measure also suggest that respondents were paying more attention to inflation when it was higher.

Photo by engin akyurt on Unsplash

Inflation surprises influence future expectations more when inflation is high

A consequence of attention increasing with inflation is that consumers also incorporate new information into their expectations for future inflation more readily when inflation is high. Here, we measure this new information comprehensively using surprises that reflect how much actual inflation over the past year exceeded consumers’ expectations. The idea is that if inflation is higher than you previously expected, you might think that inflation in the future will also be higher than you thought before. Figure 4 shows how surprises in actual 12-month inflation relate to how high or low consumers expect inflation to be in the short term (in one year) and in the long term (in five to 10 years). When inflation levels are low, consumers’ long-term expectations barely react when actual inflation turns out to be higher than they thought, but there is a strongly positive reaction when inflation is high. We find corroborating evidence of long-term inflation expectations being more responsive to new information, or “less-anchored,” more generally when inflation levels are high in the form of greater disagreement among consumers as well as larger month-to-month changes in these expectations.

Figure 4 – Inflation and inflation expectations in the short and long term 

Implications for monetary policy

In the same way that the economy can experience wage-price spirals—feedback loops between nominal wage increases and price inflation—the relationship between inflation levels and consumer attention presents the potential for attention-price spirals: High inflation brings increased attention, leading to even greater price pressures. Such a possibility highlights the need to quickly tamp down rising inflation.

Consumer attention to inflation can also factor into the typical relationship between employment and inflation, where an overheated labor market can lead to high inflation while a weak labor market can lead to lower inflation. We calculate that the decline in attention due to inflation falling between the 1970s and the low-inflation era of the 2010s implies a material weakening of this relationship between inflation and employment. The strength of this relationship determines the tradeoff between inflation and employment, the two sides of the Federal Reserve’s dual mandate. If inflation is less responsive to changes in employment because consumers are less attentive to economic conditions, then even more slowing of the labor market will be required to rein in inflation. This worsening tradeoff could become a challenge for central bankers trying to navigate the so-called “last mile” back to the two percent inflation target as our current spell of pandemic-era high inflation subsides and consumers’ attention begins to fade.

• This article is based on the paper, ‘Inflation Levels and (In)Attention’, in the Review of Economic Studies.
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• Note: This article gives the views of the author, and not the position of the Federal Reserve Board of Governors, the Federal Reserve Bank of Boston, the Federal Reserve System, USAPP – American Politics and Policy, nor the London School of Economics. 
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