NEW YORK (MainStreet) — When consumers expect inflation, they go shopping, according to new research from the University of Chicago Booth School of Business. That would mean, in theory, that with the Fed to raise interest rates later this year and inflation to move in tandem, consumers would increase their purchasing now and give the economy a healthy shot in the arm.
"Central banks around the world try to raise inflation expectations via unconventional monetary policy measures to increase spending,” University of Chicago Booth School of Business professor Michael Weber said in a released statement.
In their newly published paper, Weber and co-authors surveyed data collected from German households from 2000 to 2013 and found that when consumers expected inflation to rise, they were more likely to spend money on consumer durable goods, such as cars, electronics and other household goods. These findings suggest that consumers increase their buying on the expectation of a rising inflation, because they would save money when the decrease in the value of money in the future was considered. Therefore, the cost of durable goods would be comparatively less.
"The positive effect of inflation expectation on residential real estate might be somewhat muted and smaller [compared to cars]," Weber says. "What makes real estate different from, say, larger electronic items or cars, is that the market for residential real estate is less liquid, consumers have to incur higher search costs, transaction costs are also higher as well as borrowing constraints."
Weber and colleagues believe that educated consumers understand the implications of inflationary projections and plan their purchasing habits accordingly.
However, not everyone agrees with this interpretation.