SUMMER 2010 VOLUME 44, NUMBER 2 381 W ¨ ANDI BRUINE DE BRUIN, WILBERT VANDERKLAAUW, JULIE S. DOWNS, BARUCH FISCHHOFF, GIORGIO TOPA, AND OLIVIER ARMANTIER Expectations of Inflation: The Role of Demographic Variables, Expectation Formation, and Financial Literacy When financial decisions have consequences beyond the immediate future, individuals’ economic success may depend on their ability to forecast the rate of inflation. Higher inflation expectations have been reported by individuals who are female, poorer, single and less educated. Our results suggest that these demographic differences in inflation expectations may be partially explained by variations in expectation formation and financial literacy. Specifically, higher inflation expectations were reported by individuals who focused more on how to cover their future expenses and on prices they pay (rather than on the US inflation rate) and by individuals with lower financial literacy. In the course of everyday life, people make a variety of financial deci- sions about saving, investing and borrowing, among other things. When their effects extend into the future, financial decisions require accurate assessments of inflation rates. Inflation expectations have been studied by economists, psychologists, marketing scientists and others concerned about individuals’ financial wellbeing and the impacts of their choices W¨ andi Bruine de Bruin (wandi@cmu.edu) is an Assistant Professor in the Department of Social and Decision Sciences and the Department of Engineering and Public Policy of Carnegie Mellon University. Wilbert VanderKlaauw (Wilbert.VanDerKlaauw@ny.frb.org) is Vice President of the Federal Reserve Bank New York. Julie S. Downs (downs@cmu.edu) is an Assistant Research Professor of Social and Decision Sciences at Carnegie Mellon University. Baruch Fischhoff (baruch@cmu.edu) is the Howard Heinz University Professor in the Department of Social and Decision Sciences and the Department of Engineering and Public Policy of Carnegie Mellon University. Giorgio Topa (Giorgio.Topa@ny.frb.org) is the Assistant Vice President and Head of the Microeconomic and Regional Studies Function, Research and Statistics Group of the Federal Reserve Bank New York. Olivier Armantier (Olivier.Armantier@ny.frb.org) is a Research Officer in the Microeconomic and Regional Studies Function, Research and Statistics Group, of the Federal Reserve Bank New York. The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York. We thank Michael Bryan, Jeff Dominitz, Eric Johnson, Arthur Kennickell, Chuck Manski, Athanasios Orphanides, Simon Potter, Robert Rich and Ken Wolpin for their advice on this project, as well as Sandy Chien, Tim Colvin, Daniel Forman, Peter Fielding, Daniel Greenwald, Tania Gutsche, Mandy Holbrook and Bas Weerman for their help with conducting the research. The Journal of Consumer Affairs, Vol. 44, No. 2, 2010 ISSN 0022-0078 Copyright 2010 by The American Council on Consumer Interests