Inflation Expectations and the Media

How are readers and viewers influenced by the media's reporting of inflation news?

Looking at news reports in Germany between 1998 and 2006, Michael Lamla and Sarah Lein of the Swiss Economic Institute find that the media can both help, and hurt, the accuracy of consumers' inflation expectations.

The volume of news reports helped close the gap between consumers' and professional forecasters' inflation forecasts. (In Germany, the pros are more accurate in their inflation predictions than consumers. That's not necessarily the case in the U.S.) News that was more prominently placed, say on the front page of the business section, also helped improve forecasts.

But accuracy was hurt during times of rising inflation. This might at first seem to be at odds with the first finding because the media is more likely to report on inflation if it's on the way up.

The answer here is likely related to media bias. Around 2002, fears spread in Germany that the changeover to the new euro currency had sparked a bout of inflation. As media reports on the "Teuro" effect, the accuracy of inflation forecasts by consumers deteriorated. The official figures, for their part, didn't show signs of high inflation. (The type of news report also mattered: TV news worsened forecasting ability while newspaper stories helped accuracy.)

The results have interesting implications for the current climate. Back in June, the Fed's Donald Kohn said he was worried that a new inflationary psychology in the U.S. had been fueled by higher energy and food prices. How much of this is spurred on by media reports and how much of it is an accurate representation of what's ahead?

The following chart shows the Google Trends results for the term "stagflation".