EMPCT Working Paper Series No. 2024-02
72 pages | PDF Download | PDF in Browser
Citation:
Pfäuti, Oliver, “The Inflation Attention Threshold and Inflation Surges” October, 2024.
Oliver Pfäuti
The University of Texas at Austin
Abstract
At the outbreak of the recent inflation surge, the public’s attention to inflation was low but increased quickly once inflation started to rise. In this paper, I quantify when and by how much the public’s attention to inflation changes, and derive the macroeconomic implications of these attention changes. I estimate an attention threshold at an inflation rate of about 4%,and that attention doubles when inflation exceeds this threshold. Adverse supply shocks become more inflationary in times of high attention, and the increase in people’s attention to inflation in 2021 accounts for half of the subsequent supply-driven inflation. I develop a model accounting for the attention threshold and show that shocks that are usually short lived lead to a persistent surge in inflation if they induce an increase in people’s attention. The attention
threshold further lengthens the last mile of disinflation after an inflation surge, and leads to an asymmetry in the dynamics of inflation.
