15 December 2019

Partisan Bias in Inflation Expectations

The authors find that inflation expectations in Republican-dominated US states were higher than in Democrat-dominated US states when Barack Obama was US president. Republican voters may well have expected government spending to increase, which is likely to give rise to higher inflation. Political parties should consider voters’ misperceptions about economic conditions.

Key issue

Political ideology influences economic assessments (partisan bias). Citizens rate the economy more favorably when their preferred party is in office. The previous studies on partisan bias ignored perceptions about inflation. An important reason for ignoring inflation expectations is that respondents to surveys tend to confuse price levels with inflation. Suitable data on inflation expectations was also not available. We examine partisan bias in inflation expectations with new data on inflation expectations. Investigating the determinants of inflation expectations is useful for describing why local factor prices differ across regions, because expectations of future prices influence nominal wages. Rising inflationary expectations likewise may suggest that citizens expect governments to pursue expansionary fiscal policies and, in turn, reduce their consumption expenditures.

Approach and methodology

We use data from the New York Fed’s Survey of Consumer Expectations (SCE) from the Center for Microeconomic Data, which compiles data on inflation expectations, to examine how such expectations influence citizens’ behavior. The SCE compiles the data by administering an internet-based survey with a rotating panel of approximately 1,300 heads of households, who participate in the panel for up to 12 months. Our sample covers the period 2013–2018.

We employ Blinder and Oaxaca’s decomposition method to disentangle the extent to which political ideology and other individual characteristics predict inflation expectations.

Key findings and conclusions

Inflation expectations were around 0.46 percentage points higher in Republican-dominated US states than in Democratic-dominated US states when Barack Obama was US president. Higher expected inflation rates in Republican than in Democratic constituencies may well suggest that Republican constituencies are more concerned about inflation than are Democratic constituencies. Republican constituencies also tend to expect Democratic governments to implement expansionary policies that are likely to give rise to higher inflation – as partisan theories predict. Compared to inflation expectations in Democratic-dominated states, inflation expectations in Republican-dominated states declined by 0.73 percentage points when Donald Trump became president. About 25 percent of the total difference between inflation expectations in Republican- and Democratic-dominated states is explained by how partisans respond to changes in presidential administrations (partisan bias). The results corroborate the belief that voters’ misperceptions of economic conditions decline when the president belongs to the party the voters support.