A German Inflation Narrative
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Date
2022-03
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Abstract
In this paper, we present a new indicator to measure the media coverage of inflation. Our
Inflation Perception Indicator (IPI) for Germany is based on a corpus of three million
articles published by broadsheet newspapers between January 2001 and February 2022.
It is designed to detect thematic trends, thereby providing new insights into the dynamics
of inflation perception over time. These results may prove particularly valuable at the
current juncture, where massive uncertainty prevails due to geopolitical conflicts and
the pandemic-related supply-chain jitters. Economists inspired by Shiller (2017; 2020)
have called for analyses of economic narratives to complement econometric analyses. The
IPI operationalizes such an approach by isolating inflation narratives circulating in the
media.
Methodically, the IPI makes use of RollingLDA (Rieger et al. 2021), a dynamic topic
modeling approach refining the rather static original LDA (Blei et al. 2003) to allow for
changes in the model’s structure over time. By modeling the process of collective memory,
where experiences of the past are partly overwritten and altered by new ones and partly
sink into oblivion, RollingLDA is a potent tool to capture the evolution of economic
narratives as social phenomena. In addition, it is suitable to produce stable time-series,
to the effect that the IPI can be updated frequently.
Our initial results show a narrative landscape in turmoil. Never in the past two decades
has there been such a broad shift in inflation perception, and therefore, possibly, in inflation
expectations. Also, second-round effects, such as significant wage demands, that
have not played a major role in Germany for a long time, seem to be in the making.
Towards the end of the time horizon, raw material prices are high on the agenda, too,
triggered by the Russian war against Ukraine and the ensuing sanctions against the aggressor.
We would like to encourage researchers to use our data and are happy to share
it on request.
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Keywords
inflation, expectations, narratives, latent Dirichlet allocation, Covid-19, text mining, computational methods, behavioral economics