In the estimation process we gradually control for several potential de-

terminants that could simultaneously affect both inflation expectations and

readiness to spend and we allow several interactions. First, we control for a

rich set of consumer characteristics: age, gender, education, employment sta-

tus and income; which we wrap up together under the group ”Demographics”.

We have already seen in section 2.1 that there is significant heterogeneity in

inflation expectations and perceptions in relation to consumer characteris-

tics. Souleles (2004) shows that variations in inflation expectations depend

on consumer demographics. The same characteristics may determine differ-

ent purchasing propensities and we would want to ensure that any impact

of inflation expectations on spending - if it is to be interpreted as structural

- is not simply driven by these differences. Second, we consider equally im-

portant to control for individual expectations of the general economic and

unemployment situation, e.g. in a booming economic environment, con-

sumers may increase spending on expectations of rising inflation or simply

due to the favourable economic context. Likewise, controlling for the in-

dividual expected financial or current debt situation is important as most

often consumer0

s personal situation has a stronger impact on his/her be-

haviour compared to the general economic developments, e.g. provided that

a consumer expects that his/her financial situation may deteriorate, his/her

consumption plans will probably decrease even though he/she expects that

the economic situation will get a lot better and inflation will increase. These

controls are grouped under ”Expectations and financial status”. Third, we

control for a number of pairwise interactions between the expected change

in inflation and the expected financial situation, debt status, employment

status, education and respectively income. Figure 4 shows in a series of

scatterplots that holding the same expectation with respect to the change

in inflation, consumers0
readiness to spend is different depending on their

education, income, the expected financial situation or employment status.

Therefore, by introducing interaction terms in our model specification we

capture this heterogeneity in the inflation expectations - readiness to spend

relationship. Fourth, we introduce annual time dummies to control for aggre-

gate macroeconomic developments. Fifth, to account for the heterogeneity

of the economies that constitute the EA, we also include country dummies5

Sixth, we also include country specific and EA macro aggregates, by drawing

on information sources outside the survey. In particular, we control for dis-

posable income, lending rates and uncertainty6

, which we hold as simultane-

ously affecting consumer inflation expectations and their spending attitudes.