I study the consequences of consumer inattention to aggregate inflation on the transmission of macroeconomic shocks. I provide a theory where consumers acquire information about prices from their shopping experiences and use this information to learn about inflation. The key feature of the theory is that inattention anchors households’ perceptions about inflation, but the degree of anchoring is endogenous and depends on structural features of the economy. I show that this information friction alone simultaneously affects the aggregate demand and supply sides of the economy, propagating and amplifying the impact of demand shocks on output. Price stickiness exacerbates the propagation created by consumer inattention, and the interaction of both frictions can be larger than the total effect of each friction considered in isolation. I use the model to show analytically and quantitatively how a change in the conduct of monetary policy can simultaneously explain the anchoring of households’ inflation expectations, the flattening of the Phillips curve, and the lower volatility and persistence of inflation observed in the last decades. The theory suggests that such a policy change also has an unintended consequence: It makes the economy more vulnerable to exogenous shifts in aggregate demand.

I propose a model of expectation formation based on shopping experiences. In the model, households acquire information about prices while shopping and use this information to form beliefs about current and future aggregate inflation. Obtaining information is costly, and shoppers choose it optimally to trade its costs and benefits. The model makes predictions relating household’s characteristics with their shopping experiences and their beliefs about aggregate inflation. I test these predictions using microdata from the New York Fed’s Survey of Consumer Expectations and find evidence supporting the model’s predictions. First, households’ expectations about aggregate inflation respond systematically to their expectations about individual prices, and the strength of this response is proportional to the expenditure share of that good. Second, individual forecasts about prices are predicted by past forecasts after controlling extensively for sources of public information. Third, households that spend more on goods like gasoline are relatively better forecasting the price of those goods.