Who’s on FIRE? Household characteristics and the formation of inflation expectations

Working paper 852
Working Papers
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Gepubliceerd: 17 december 2025

Door: Lovisa Reiche Gabriele Galati Richhild Moessner

We study how consumers form and revise inflation expectations using a unique, highly balanced monthly panel of Dutch households. We develop a Bayesian frame-work that nests Full-Information Rational Expectations (FIRE) alongside common forecasting heuristics and test it by recovering person-specific belief-updating rules from individual time-series regressions. Our novel individual-level design reveals sub-stantial heterogeneity in how households process information over time. On average, consumers systematically overreact to current inflation, echoing patterns found for pro-fessional forecasters. Only 2.5 percent, predominantly wealthier, more educated men, behave consistently with FIRE. Most consumers rely on simple heuristics, especially adaptive expectations. Our results show that heuristic learning, not FIRE, character-izes expectation formation for the vast majority of households. Crucially, heterogeneity in belief updating is both large and systematic.

Keywords: Household Inflation Expectations; FIRE; Heuristic Learning
JEL codes E31; E37; E70

Working paper no. 852

852 - Who’s on FIRE? Household characteristics and the formation of inflation expectations

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Research highlights​

  • We examine the formation of household inflation expectations one year ahead at the aggregate and individual levels using a representative Dutch household survey and find that forecasting rules of households are on average similar to those of professional forecasters.  

  • However, the average hides substantial heterogeneity across households. Only a very small fraction of participants form forecasts consistent with rational expectations (mostly wealthier and educated men).  

  • The most prevalent are adaptive expectations (24%), mean-reverting expectations (19%) and a fundamentalist rule (18%). For around half of the sample of households we find that their expectations do not conform to any simple rule.  

  • We find that socio-economic characteristics, such as gender and education, matter for how inflation expectations are formed.  

  • An important policy implication of our paper is that when confronted with a sudden surge in inflation, policymakers should closely monitor inflation expectations of households with different socio-economic characteristics as this could relevant for the assessment of the persistence of inflationary pressures. 

 

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