Staff Working Paper No. 1,133
By Johannes J. Fischer, Christoph Herler and Philip Schnattinger
We study the causal effects of inflation uncertainty on British households’ consumption and saving decisions. To separate expected inflation from uncertainty about inflation, we use a representative survey to randomly inform households about the first and/or second moments of forecasters’ inflation predictions. Lower inflation uncertainty raises planned spending and expected income, but reduces uncertainty about expected income and interest rates. Higher planned spending is mainly driven by less precautionary saving. In the months following the treatment, households reduce their monthly savings, but report an increase in fixed-return asset holdings. These results are consistent with households attributing inflation to supply-side shocks.
When the fog clears: the effect of reduced inflation uncertainty on households’ financial behaviour
