Inflation Expectations and Inflation Forecasting: Consumers versus Professional Forecasters

Abstract

By using Michigan and SPF surveys, this thesis compares the group-level inflation-forecast performance as well as information transmission between two main market participation groups, consumers and professional forecasters. Group-level performance are in terms of forecasting different U.S. inflation indexes and evaluated using forecast accuracy measured by RMSE as well as predictive power tested by a linear model. In addition, consumers are decomposed into three sub-groups based on educational attainment and income distribution to explore within-group heterogeneity. The results indicate that both consumer groups and professionals show poor forecast performance for all the inflation measures, except professionals’ performance for CPI-Core. Further, gathering downward-biased inflation forecasts from professionals is a possible reason that contributes to highly educated consumers’ inflation-forecast performance for price changes of expenditure categories they care.