Unfavorable news attention distorts inflation forecasts
A Federal Reserve study reveals that within-household reallocations of attention to news significantly impact inflation expectation bias. Shifting focus to unfavorable social, political, or geopolitical narratives, rather than inflation news itself, substantially increases this bias.
The asymmetry of attention
A Federal Reserve study, utilizing microdata from the Michigan Survey of Consumers, reveals that within-household reallocations of attention to news significantly impact inflation expectation bias.
Shifting focus toward unfavorable economic news substantially increases forecast bias, while attention to favorable news decreases it.
Crucially, the largest increases in bias stem not from inflation news directly, but from unfavorable social, political, and geopolitical narratives.
Conversely, dropping attention to an unfavorable topic has little effect, highlighting a pronounced asymmetry where unfavorable signals leave a more persistent imprint on beliefs.
This suggests that the composition of news within a household's limited attention set, rather than the sheer volume, drives these belief distortions.
Aggregate echoes of individual focus
The study quantifies forecast bias by measuring deviations of survey expectations from a real-time, machine-learning full-information benchmark.
This allows direct observation of how household attention composition changes and relates to shifts in forecast bias.
A key finding is that aggregate news sentiment has no significant effect on bias when a household's attention allocation is unchanged; active attention reallocation is the primary driver.
These household-level effects have aggregate implications: bias is amplified when the attention network is dominated by an unfavorable focal hub, crowding out favorable narratives.
Past and present attention together account for up to 70 percent of observed forecast bias, with current attention rising sharply during recessions.
A new lens on belief formation
This paper offers a crucial micro-foundation for understanding persistent inflation forecast errors, moving beyond simple information frictions.
By highlighting the outsized role of non-economic narratives and attention allocation, it challenges traditional rational expectations models.
The findings suggest that central bank communication strategies might need to consider broader societal narratives to effectively manage public expectations.