Economics Letters 117 (2012) 807–810 Contents lists available at SciVerse ScienceDirect Economics Letters journal homepage: www.elsevier.com/locate/ecolet Updating inflation expectations: Evidence from micro-data Lena Dräger a , Michael J. Lamla b,* a University of Hamburg, Germany b ETH Zurich, KOF Swiss Economic Institute, Switzerland article info Article history: Received 22 May 2012 Received in revised form 16 August 2012 Accepted 20 August 2012 Available online 31 August 2012 JEL classification: D84 E31 Keywords: Updating Inflation expectations Micro-data Time-varying degree of inattention abstract Utilizing the Michigan Household Consumer survey’s rotating panel microstructure we can identify if individuals have adjusted their expectations towards inflation. This allows us to directly capture the updating behavior of individual consumers regarding their short- and long-run inflation expectations. © 2012 Elsevier B.V. All rights reserved. 1. Introduction Inflation expectations play a central role in modern macroe- conomic models and are an important factor for economic policy. However, despite their importance we still know very little about how people form expectations. Researchers have proposed a wide array of frameworks to model the expectations’ formation process. Contributions by Sims (2003) and Mankiw and Reis (2002) revived the interest in information rigidities and their importance for the formation of expectations. The idea of this paper is to analyze the updating behavior of in- dividual consumers regarding their inflation expectations. For this purpose we utilize the rotating panel structure of the University of Michigan Survey of Consumers, where a fraction of consumers is re-interviewed after six months. Using an identification algorithm we can track the expectations of individual consumers over a pe- riod of six months. Hence, we can directly calculate the share of individuals that have adjusted their expectations and thus do not need to rely on inference coming from the cross-section or the ag- gregated series. Our paper is related to the literature that analyzes the updating behavior of consumers regarding their inflation expectations. For * Correspondence to: Weinbergstrasse 35, 8092 Zurich, Switzerland. Tel.: +41 44 632 8623; fax: +41 44 632 1234. E-mail addresses: lena.draeger@wiso.uni-hamburg.de (L. Dräger), lamla@kof.ethz.ch (M.J. Lamla). the US, Carroll (2003) finds support for the conjecture of Mankiw and Reis (2002) that consumers update their inflation expectations roughly once a year. Pfajfar and Santoro (2012) test the hypotheses in Carroll (2003) using micro-data. Looking at the movements of forecast errors in relation to the variable being forecasted, Coibion and Gorodnichenko (2010) document pervasive and robust evidence consistent with information rigidities. For Europe, Döpke et al. (2008) show that consumers update their inflation expectations once every 18 months. Lamla and Sarferaz (2012) document substantial time-variation in the inflation expectation updating behavior of German households. Using micro-data for inflation expectations of professional forecasters, Andrade and Le Bihan (2010) report evidence of information frictions. In sum, these studies provide evidence for staggered updating and for information frictions. Our paper tests the relevance of information frictions by directly identifying the changes of expectations of individuals. 2. Data We employ the micro data set from the University of Michigan Survey of Consumers, where we use both the quantitative and the qualitative questions for inflation expectations regarding the next 12 months, and regarding a longer horizon of five to ten years. The micro-data is available from January 1978 to November 2011. The precise questions of the survey read: A12. ‘‘During the next 12 months, do you think that prices in general will go up, or go down, or stay where they are now?’’ 0165-1765/$ – see front matter © 2012 Elsevier B.V. All rights reserved. doi:10.1016/j.econlet.2012.08.033