Changing inflation perception and the propagation of news shocks

Abstract Based on a previously established text data-based indicator, the Inflation Perception Indicator (IPI), we analyze the information content of inflation-related media coverage. It is argued that media do not report on inflation in a constant or systematic manner but instead react to specific events, which means that reporting is state-dependent. Using a dynamic extension of the Latent Dirichlet Allocation (LDA) topic modeling approach we examine the salience and framing of inflation in a corpus of 50,000 articles published by major German newspapers between 2001 and 2024. This approach allows to decompose the IPI into dynamic topic-specific subindicators. To analyze the information content of these newly constructed indicators, we estimate a threshold Bayesian Vector AutoRegressive (BVAR) model for variables from a New Keynesian macroeconomic model with two inflation regimes. Our results suggest that the topic-specific IPI subindicators contain different information about price developments. Moreover, we find some evidence that households make different use of this information in high- and low-inflation regimes when adjusting their inflation expectations.