Edward S. Knotek

Using a five-year survey of over 170,000 US consumers, we provide a novel direct measure of attention to monetary policy and show that the data strongly support the predictions of a rational inattention model. First, attention is incentive-driven: consumers with "skin in the game"—those planning major purchases like homes or cars—are significantly more attentive to monetary policy news. Second, attention varies systematically with interest rate volatility and news supply, exhibiting cyclical patterns around FOMC meetings. Third, marginal effects of volatility and news supply decline with "skin in the game," implying external factors primarily affect low-skin-in-the-game consumers. These findings imply that, when communication is costly and attention is endogenous, optimal central bank communications in our model target consumers who bear the largest welfare losses from information frictions. This targeted communication approach increases aggregate attention to monetary policy, leading to an amplified response of consumption to interest rate changes.

The Survey of Firms' Inflation Expectations (SoFIE) is a quarterly survey of chief executive officers and other top business executives in the United States that collects information about their inflation expectations. This Economic Commentary presents questions newly introduced to SoFIE—some related to inflation and others examining expectations for prices, costs, employment, and wages—and provides initial analysis of the collected responses. The expanded set of survey results will be updated on a quarterly basis on the Federal Reserve Bank of Cleveland's website at clefed.org/SoFIE.

Different survey-based measures of consumer inflation expectations have diverged in recent months. This Economic Commentary compares these measures and the survey questions underlying them. Our analysis suggests that the divergences across survey-based measures of inflation expectations can be attributed to various features and sample characteristics specific to each survey.

We study how monetary policy communications associated with increasing the federal funds rate causally affect consumers' inflation expectations in real time. In a large-scale, multi-wave randomized controlled trial (RCT), we find weak evidence that communicating these policy changes lowers consumers' medium-term inflation expectations on average. However, information differs systematically across demographic groups, in terms of ex ante informedness about monetary policy and ex post compliance with the information treatment. Monetary policy communications have a much stronger effect on the subset of consumers who had not previously heard news about monetary policy and who take sufficient time to read the treatment. Our findings show that, in an inflationary environment, these consumers expect that raising interest rates will lower inflation. More generally, our results emphasize the importance of measuring both respondents' information sets and their compliance with treatment when using RCTs in empirical macroeconomics to better understand the real-world implications of monetary policy communications.

This chapter summarizes the mixed-frequency methods commonly used for nowcasting inflation. It discusses the importance of key high-frequency data in producing timely and accurate inflation nowcasts. In the US, consensus surveys of professional forecasters have historically provided an accurate benchmark for inflation nowcasts because they incorporate professional judgment to capture idiosyncratic factors driving inflation. Using real-time data, we show that a relatively parsimonious mixed-frequency model produces superior point and density nowcasting accuracy for headline inflation and competitive nowcasting accuracy for core inflation compared with surveys of professional forecasters over a long sample spanning 1999-2022 and over a short sample focusing on the period since the start of the pandemic.

We study how monetary policy communications associated with increasing the federal funds rate causally affect consumers' inflation expectations. In a large-scale, multi-wave randomized controlled trial (RCT), we find weak evidence on average that communicating policy changes lowers consumers' medium-term inflation expectations. However, information differs systematically across demographic groups, in terms of ex ante informedness about monetary policy and ex post compliance with the information treatment. Monetary policy communications have a much stronger effect on people who had not previously heard news about monetary policy and who take sufficient time to read the treatment, implying scope to increase the impact of communications by targeting specific groups of the general public. Our findings show that, in an inflationary environment, consumers expect that raising interest rates will lower inflation. More generally, our results emphasize the importance of measuring both respondents' information sets and their compliance with treatment when using RCTs in empirical macroeconomics, to better understand the well-documented evidence of heterogeneous treatment effects.

We examine businesses' price-setting practices via open-ended interviews and in a quantitative survey module with business contacts from the Federal Reserve Banks of Atlanta, Cleveland, and New York in December 2022 and January 2023. Businesses indicated that their prices were strongly influenced by demand, a desire to maintain steady profit margins, and wages and labor costs. Survey respondents expected reduced growth in costs and prices of about 5 percent on average over the next year. Backward-looking, forward-looking, and hypothetical scenarios reveal average cost-price passthrough of around 60 percent, with meaningful heterogeneity across firms.

The inflation expectations of individuals who lead firms can influence the prices that their firms charge customers and hence can influence overall inflation. This Economic Commentary summarizes results from the Survey of Firms’ Inflation Expectations (SoFIE), which asks top business executives for their inflation expectations once per quarter alongside a second question from a rotating set. We document that this group’s inflation expectations increased with the run-up in inflation over 2021 and 2022 but then began to decline in early 2023. The Cleveland Fed will post estimates from the Survey of Firms’ Inflation Expectations each quarter, available via clefed.org/SoFIE.

We implement a novel methodology to disentangle two-way causality in inflation and income expectations in a large, nationally representative survey of US consumers. We find a 20 percent passthrough from expected inflation to expected income growth, but no statistically significant effect in the other direction. Passthrough is higher for higher-income individuals and men. Higher inflation expectations increase consumers’ likelihood to search for higherpaying new jobs. In a calibrated search-and-matching model, dampened responses of wages to demand and supply shocks translate into greater output fluctuations. The survey results and model analysis provide a labor market channel for why people dislike inflation.