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How do households form their expectations about inflation and how do they affect their consumption decisions? We provide new stylized facts based on household surveys: i) inflation expectations are heterogeneous but a large fraction of individuals expect stable prices; ii) a large share of the adjustment in the average inflation expectation comes from the change in the share of households expecting stable prices (the extensive margin); changes in the average expectation of households reporting positive inflation (the intensive margin) contribute much less; iii) the extensive margin is negatively correlated with realized inflation, and increases more for low realizations; iv) individual inflation expectations have a positive effect on individual durable consumption decisions and this effect is mostly driven by the extensive margin of inflation expectations; consumption reacts little to the intensive margin of inflation expectations.
