Starting in the fall of 2007, the New York Fed has conducted a long-term research project to improve our understanding of existing measures of consumer expectations, and to explore the feasibility of expanding and potentially improving these measures. We developed and then tested new questions on expectations, designed measures of individual forecast uncertainty, and collected information on expectations and decisions for a broader range of household behavior than is currently gathered by existing surveys. In general, we wanted to understand better the process of forming expectations and updating those expectations, as well as the links between expectations and consumer behavior. In pursuing this project, we collaborated with the RAND Corporation, other Federal Reserve Banks, academic economists, and psychologists with expertise in survey design. We conducted in-depth cognitive interviews and fielded psychometric survey modules utilizing RAND’s American Life Panel, and various convenience samples created by researchers at Carnegie Mellon. Finally, we conducted many experimental surveys as part of the American Life Panel internet survey. Incorporating the lessons we learned from these initiatives led to the final design and implementation of our Survey of Consumer Expectations. Our goal throughout has been to collect timely and high-quality information on consumer expectations and decisions. We were particularly interested in filling in what we viewed as gaps in existing sources of information on household behavior, including data on household finance, labor, and housing market expectations. In addition, we decided that a rotating panel structure, one that tracks the same individuals over time, was necessary for many research and policy applications.

Subsequently, within the course of the same survey, they were asked to choose between two possible financial investments, one that gives a fixed nominal return after twelve months, and another that yields a return indexed by inflation, again after one year. Respondents were told that two survey participants would be drawn at random and be paid according to their choice in the investment after twelve months. Theory predicts that respondents would be more likely to pick the inflation-protected investment if they expect higher inflation. Indeed, we find a strong association between expectations and actual choices in the experiment. Furthermore, those who express higher uncertainty about future inflation are also more likely to choose the inflation-protected investment. Both patterns are in accordance with the theory. Interestingly, the connection between expectations and experimental choices is weaker for respondents with low education, numeracy, and financial literacy. Our research thus shows that consumer expectations elicited through surveys are correlated in a meaningful way with actual behavior. We also find that expectations inform behavior in other contexts: for instance, workers who express a higher perceived chance of losing their current job over the next twelve months also search harder for a new job and exhibit a drop in spending plans relative to the present over the same time horizon. The second area of research related to our consumer survey has focused on the formation and updating of inflation expectations.