Information Networks and Inflation Expectations

Abstract

How are inflation expectations affected by foreign supply shocks? We show that, beyond bilateral exposure, a second network matters: the one linking forecasters to the countries they cover. Using forecasterlevel expectations around conflict episodes—precisely dated supply shocks that raise inflation through trade and energy linkages—we find that expectations are revised upward gradually in the days following a conflict. Within the same country and day, forecasters who cover the conflict country revise by 0.2 to 0.3 percentage points less than those who do not, and the differential roughly triples where bilateral exposure is highest. We rationalize this in a model where a public narrative overstates spillovers in proportion to bilateral exposure, and only forecasters covering the conflict country can discount it. The consensus therefore inherits a bias largest where exposure is high and coverage thin, and a central bank reading it at face value tightens more than fundamentals warrant.