What determines households inflation expectations? Theory and evidence from a household survey

•The paper studies how households form inflation expectations.•It introduces a new extended theory.•The empirical investigation uses a novel survey-based dataset.•It investigates the heterogeneous behavior of different demographic groups.

The purpose of the present paper is to study how households form inflation expectations using a novel survey dataset of Italian households. We extend the existing 'inattentiveness' literature by incorporating explicitly inflation targets and distinguishing between aggregate and disaggregate dynamics based on demographic groups. We also consider both the short- and long-run dynamics as households update their inflation expectations. While we find clear distinctions between the various demographic groups behavior, households tend to absorb professionals forecast. The short-run dynamics also indicate they not only overreact when updating their expectations but also adjust asymmetrically to any perceived momentum change of future inflation.