Visible prices and their influence on inflation expectations of Russian households

Vadim Grishchenko, Diana Gasanova, Egor Fomin and Grigory Korenyak

A multitude of recent research shows that the rationality of inflation expectations of households is bounded. When making inflation forecasts, people tend to focus on particular goods’ and services’ prices which they can observe every day — ‘visible prices’. In this paper, we propose a new method of identification of such items. Our novel ‘brute force’ algorithm automatically sorts through a full array of goods’ and services’ prices given by Rosstat and constructs consumer baskets. Then, it selects the best baskets based on their ability to forecast inflation expectations of the Russian households from the FOM Survey. In the end, we get a decomposition of various metrics of inflation expectations on visible items’ prices which also demostrates good forecasting performance (as compared to AR(1) process as a benchmark). To ensure robustness, we use an alternative method (optimization with regularization) and a variety of metrics of inflation expectations. As a result, we get lists of ‘robust visible items’ which include not only foodstuffs but mainly durable goods and services. Surprisingly enough, oil or gasoline which are typically labeled as ‘visible goods’ in research, do not fall into this category for Russia.