2009-10 | February 2010
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Survey Measures of Expected Inflation and the Inflation Process
This paper uses data from surveys of expected inflation to learn how expectations processes have changed following recent changes in the behavior of inflation. Households do not appear to have recognized the change in the process, and are placing substantially more weight than appears warranted on recent inflation data when forming expectations about inflation over the next year. At first glance, professional forecasters do appear to have changed how they predict inflation. But a closer look at the data reveals that professionals are relying on core rather than headline inflation, and are placing too much weight on recent core inflation data. These errors show up in a noticeable (absolute and relative) deterioration in the forecast accuracy of both households and professionals.
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