Bank of England publishes working paper finding US households overweight house price expectations by 25%-45% in inflation expectations

The Bank of England has published a staff working paper examining how households in the United States form inflation expectations. The research finds that households give house price expectations a much larger role than is justified by their direct role in measured inflation, with estimated weights of 25%-45%, indicating that housing acts as a highly salient sector in shaping perceived inflation. Using the Federal Reserve Bank of New York Survey of Consumer Expectations and the University of Michigan Survey of Consumers, the paper tests this result with instrumental-variable methods and household-level heterogeneity. It finds that actual house price growth has only a small near-term effect on CPI inflation, with benchmark coefficients of 0.004 to 0.04, yet households still overweight house prices when forming inflation views. The effect is smaller for more numerate and more educated households, and larger for households that moved recently or report a likelihood of default. In a two-sector New Keynesian model, the paper finds that overweighted sectors become disproportionately important for monetary policy because the behaviour changes the IS equation and the interest rate response needed to match perceived inflation, while leaving the Phillips curve and the central bank loss function unchanged. The paper is presented as research in progress intended to encourage comments and debate.