We analyse the relationship between inflation expectations and household expenditure in a high-inflation environment (early 1990s) and in a low-inflation one (2016-19), in which we focus on consumers' willingness to buy durables (cars). The use of data from the Survey of Household Income and Wealth conducted by Banca d'Italia allows us to consider the composition of household balance sheets as well.
In a context of high inflation and wages closely indexed to price changes, higher inflation expectations led to a lower real interest rate and a widespread increase in current expenditure to the detriment of future expenditure, especially for younger and indebted households. In more recent years, characterized by low interest rates and price dynamics, the loss of purchasing power associated with higher inflation expectations prevailed over other channels, reducing the propensity to buy durable goods.
