7/2023 Merike Kukk, Jan Toczynski, Christoph Basten. Beyond the Headline: How Personal Exposure to Inflation Shapes the Financial Choices of Households
Using individual level panel data from a period of volatile inflation in Estonia in 2005-11 and interactive fixed effect estimation, we find individual consumption to respond to personal inflation beyond the headline rate. Households are exposed to different inflation due to different consumption baskets. For each percentage point of higher personal inflation exposure, they increase consumption by more than 1%, and also increase stock market investments. These responses are consistent with backward-looking inflation expectations. They are financed with savings or borrowing, except when the household is liquidity-constrained or over-indebted. Extra demand when inflation is already high can make inflation persistent and dependent on its current distribution.
