Perceptions and expectations of price changes and inflation: A review and conceptual framework

Drawing on relevant literature from a diverse range of academic disciplines we present a conceptual framework intended to further our understanding of perceptions and expectations of price changes and inflation. Based on this framework, we provide a detailed review of the literature and an analysis of open issues in current research. The review is primarily concerned with individuals’ perceptions and expectations of price changes and inflation, which can influence individuals’ economic behaviour (e.g. spending and saving decisions). The main insight from the review is that while consumers may have a limited ability to store and recall specific prices, and even succumb to a number of biases in the way in which they form perceptions and expectations of global price changes, they do seem to have some feel for, and ability to judge and forecast, inflation. How they achieve this, however, is still an open question, although plausible explanations have been proposed. While much important research has been undertaken and significant progress made in our understanding of the psychology of inflation, there remain many unanswered questions and interesting avenues for future research, which are discussed in the final part of the paper.