The Research On Our Urban Households’ Consumption Function Under Inflation Expectation

Since the international crisis happened,people are concerned about how to enlarge the domestic demand and how to boost consumption. In the agenda of the authority’s economic conference, enlarging demand especially consumption demand definitely become the focus of the authority’s work in the next stage.Through the study of consumption function, and focus on the study of the influence of infation expectation on consumption, we can understand the character of our urban residents’consuming behavior better, this will play an important role in promoting the health and stable development of our country.After experiencing a few inflations, our country’s urban residents know the inflation rationally, and form inflation expectation gradually. What’s more inflation expectation is important basis which residents judge the future situation. It can affect consumers’behavior of consumption and investment and the expectation of future real income. Inflation expectation influences the consumption behavior by substitute function and wealth function. However, high inflation expectation can bring on pessimism of future economy. Then the urban residents will make much precautionary deposit and invest the real assets, which may result in the asset bubbles. inflation expectation is hard to be quantitative variable. This paper transforms the qualitative data from the Consumers Saving Survey System that is conducted by the People’s Bank of China, into quantitative expected inflation by gap method. Adopted co- integrating theory, this paper formed error correction model concerning our country’s urban residents’consumption function with regard to inflation expectation. It concludes that reasonable inflation expectation will raise consumption by substitute function and wealth function which is stronger than the decrease of real income. But the residents have formed rational expectation, higher or lower inflation expectation will reduce consumption and make large precautionary deposit because of residents’concern about the income expectation.