How Inflation Expectations De-Anchor: The Role of Selective Memory Cues

A selective recall model predicts how inflation expectations should change with current cues. Data from the New York Fed’s Survey of Consumer Expectations and the University of Michigan’s Consumer Survey confirm these predictions, yielding two new insights. First, households’ expectations are rigid when inflation is anchored but highly unstable when surges in inflation trigger the retrieval of forgotten highinflation episodes. This effect quantitatively accounts for the post-pandemic rise in inflation expectations, particularly among the elderly. Second, cued recall explains a striking failure of rationality: a statedependent discrepancy between people’s point and density-based expectations of future inflation. The structure of memory offers new tests and insights on inflation expectations and their measurement.