Belief distortions and disagreement about inflation

Disagreement in beliefs correlates with consensus expectations, inflation, and forecast errors. We evaluate whether disagreement emerges endogenously from irrational beliefs, and whether it is relevant for inflation and unemployment outcomes. Using the microdata of households' one-year-ahead inflation expectations from the Michigan Survey of Consumers, we estimate a functional data measure of inflation beliefs’ distribution. Disagreement explains most of its effect on inflation. Then, local projections simulate a belief distortion shock and show that an increase in consensus pessimism - defined as upward biases in inflation and unemployment forecasts - leads agents to price future uncertainty using information from the cross-sectional distribution of inflation expectations: higher inflation disagreement reflects lower expected profits, hence leading firms to increase inflation; whereas, they become more attentive towards firing decisions, explaining negligible effects on unemployment in the short to medium term.