Inflation Expectations and Input Costs in the Construction Industry in New Zealand

Abstract

This dissertation examines the formation of inflation expectations among households particularly the influence of input costs changes in construction in the context of New Zealand. Unlike the previous research, which focused on firms’ inflation expectation, this research investigates households’ responses to input cost fluctuations and consider how these adjustments reflect broader inflationary expectations. The findings document those changes in sector-specific costs and expectations, particularly within construction, comove and serves as forward-looking indicator of inflation. This effect is especially pronounced in times of economic shocks, supporting the theory of “rational inattention” where households selectively respond to prominent price changes and disregard minor fluctuations in stable time periods. While this research is constrained by a short-term and aggregate data which obscured long term trends and demographic variations, the high correlation in expectations and costs of input offer important implications for monetary policy. Targeted approaches in sectors which have high impact on expectations can aid in anchoring inflation expectations during the period of economic shocks/instability. These insights highlight the critical role of sector-specific costs which plays a vital role in shaping household inflation expectations, suggesting that monetary policy can benefit from a dual focus on macroeconomic conditions and sectoral dynamics.