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The relationship between the level of inflation and attention to it, and its implications [BOK Issue Note 2023-20]

Group : Macro Economy
Research Department (02-759-5393) 2023.09.19 19901

1. We proxy for the attention that inflation receives via the frequency of internet searches for words related to prices and consumers’ perception gap on inflation. We chose “prices”, “price growth rate” and “inflation” as words related prices and measure the frequency of searches for these words on Google and Naver1). We derive the gap between consumers’ perception and the rise in the consumer price index (CPI) in the last one year based on the Consumer Survey results and the actual rise in the CPI.


2. Empirical study shows when the inflation rate exceeds a certain threshold, economic agents turn increasingly attentive towards inflation. When the inflation rate runs beyond a certain level, internet searches on the prices related words increase sharply, and the disparity between consumers‘ perception on the inflation rate and the actual rate lessens as consumers become more acute about price movements. Precedent studies discovered the common phenomenon of attention to inflation accelerating when the inflation rate hits above a certain level in many countries.


3. When attention to inflation rises due to noticeable gain in inflation, information on prices and the shock immediately impact economic agents’ expectations to make inflation expectations can become unstable. According to the results of a threshold vector autoregression (TVAR) analysis, when the inflation rate is higher than the attention threshold, price shocks have deeper and longer lasting impact on inflation expectations. 


4. Under the environment where the inflation rate is expected to hover beyond the target level for some time, the central bank must put focus on stabilizing price until the inflation rate comes down near the target.


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