To our knowledge, these results provide the first direct evidence regarding a meaningful link between survey-based inflation expectations and actual behavior.32 In the second experiment, we studied the formation process of inflation expectations by looking at whether and how survey respondents updated their inflation expectations when they received relevant new information.33 Specifically, we first elicited inflation expectations. We then randomly provided information to a subset of respondents on either past food price inflation, or professional economists’ forecasts of future inflation from the SPF. Finally, we reelicited respondents’ inflation expectations, and studied whether they were correlated with the information content of the signal they received.34 We found that respondents, on average, updated their inflation expectations in response to the information provided, and they did so sensibly and in a direction consistent with Bayesian updating – with larger revisions for less informed respondents and for those with greater baseline uncertainty. Further, there was significant heterogeneity both in how fully informed respondents were about objective inflation measures and in their updating behavior. This finding points to the potential importance of allowing for heterogeneous informationprocessing rules in our economic models. These findings are also consistent with existing sticky-information models of expectations formation, since cross-sectional disagreement falls after the provision of information.35 Results from the experiment also indicate that expectations about changes in the “prices you pay,” like the similar Michigan survey question about “prices in general,” are more responsive to information about food prices than expectations about the rate of inflation.

Together, these policies will help to sharpen the substitution effects necessary for shifting to cleaner transportation modes and improving energy efficiency as carbon taxes rise. Let me make three observations about carbon pricing. First, carbon taxes should be implemented equitably so that they do not overly burden low-income households and SMEs. Singapore does not intend to derive extra net revenue collected from the carbon tax. The carbon tax revenue will be used to cushion the impact on lower-income households through U-Save rebates and incentives to switch to energy efficient appliances. Carbon tax revenues will also be directed to SMEs to help boost their energy efficiency and decarbonisation efforts. This is an economically sound approach: it retains the desired allocative effects of higher carbon taxes while dampening its distributional consequences. Second, green subsidies are useful complements to carbon pricing but they are not substitutes. Subsidies for clean technology and energy efficiency can help to speed up the transition towards sustainability. But they often make economic sense only if combined with some form of carbon pricing. Take for instance subsidies for electric vehicle purchases and infrastructure. Without a price on carbon that is in turn reflected in electricity prices, subsidies for electric vehicles will likely lead to more such cars on the road with little reduction in the number of petrol-powered cars or shift towards cleaner sources of electricity generation.