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This research examines how errors in inflation expectations influence household economic decisions and mental well-being.

June 14, 2026Open Access

The Shadow Cost of Inflation: How Expectation Errors Affect People’s Consumption Decisions and Mental Health

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Randomized trial reveals inflation expectation errors affect consumption and mental health, highlighting communication strategy implications.

This research examines how errors in inflation expectations influence household economic decisions and mental well-being.
Used inflation expectations from the New York Fed Survey of Consumer Expectations (SCE) and linked with U.S. Census Household Pulse Survey data.
Implemented Optimal Transport (OT) methods to create a synthetic dataset combining belief data with spending and mental health measures.
Analyzed the psychological and economic effects of inflation expectation errors on household behavior.
Households over-forecasting inflation increase food stockpiling behavior despite maintaining nominal budget constraints.
Households under-forecasting inflation reduce grocery and restaurant spending and experience significant psychological distress.
Negative effects are notably severe among lower-income households lacking the liquidity to manage financial shocks.

Daniel Simon (2026) studied this question.

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Randomized trial reveals inflation expectation errors affect consumption and mental health, highlighting communication strategy implications.