Assessment of the impact of financial literacy on inflation expectations based on pseudo‑panel data for Russia

Many studies have found that inflation expectations vary systematically across population groups. This heterogeneity is driven among other factors by the level of financial literacy — a pattern documented for Russia as well. Earlier Russian evidence, however, rested on a single survey wave; we confirm the finding using data spanning three years: respondents with higher financial literacy tend to have lower inflation expectations. For this study, we rely on the pseudo-panel method to combine the results of two regular household surveys focused on inflation expectations and consumer finance. Our findings are based on responses to both quantitative and qualitative questions, controlling for key socio-demographic characteristics. We show that inflation expectations are linked to the level of financial literacy, but this relationship is nonlinear. Our conclusion holds for short- (one month ahead), medium- (one year ahead) and long-term (three years ahead) expectations. The nonlinearity of the relationship is evident: despite similar differences in the level of financial literacy, the gap in inflation expectations is larger in the least competent group of respondents in comparison with financially literate participants. We find that estimates of future inflation are linked to financial literacy through the perception of observed inflation, as more financially literate respondents cite lower rates of price growth, and their opinions about future inflation are tied to their estimates of observed price movements. Financially literate respondents’ estimates of current inflation are closer to the Rosstat-calculated measure of price growth than are the estimates of other respondents.