Whose Inflation Expectations Best Predict Inflation?

Abstract

We examine the predictive relationship between various measures of inflation expectations and future inflation. We find that the expectations of professional economists and of businesses have tended to provide more accurate predictions of future inflation than the expectations of households and of financial market participants. However, the forecasts coming from a relatively simple and popular benchmark inflation forecasting model have historically been roughly as accurate as the expectations of businesses and professional economists.

Inflation Expectations in the Wake of the War in Ukraine

“…We document that individuals saw the start of the war in Ukraine as a large shock to energy prices, which they expected would increase even further going forward. Our finding is consistent with the insights from Verbrugge and Higgins (2015), who document that unusual changes in energy-prices influence movements in individuals' inflation expectations.…”

“…D'Acunto et al (2021) show that individuals' inflation expectations are strongly influenced by the price signals they most often observe, and fuel prices were very salient when the invasion started. Additionally,Verbrugge and Higgins (2015) document that unusual changes in energy-prices influence movements in individuals' inflation expectations.…”

Out of Bounds: Do SPF Respondents Have Anchored Inflation Expectations?

“…Inflation expectations play a crucial role in economic decision making and inflation dynamics (Ang, Bekaert, and Wei 2007, Faust and Wright 2013, Verbrugge and Zaman 2021). Anchored inflation expectations are important for monetary policy efficacy.…”

Greater Than the Sum of the Parts: Aggregate vs. Aggregated Inflation Expectations

“…These findings have held up over time (Dawes et al, 1989), and although they apply to experts, there is little reason to think that lay respondents would perform any better. In fact, professional forecasts of inflation consistently outperform those of lay households (Carroll, 2003;Verbrugge and Zaman, 2021).…”