Do Household Expectations Help Predict Inflation?

Author/Editor:

Luis Brandão-Marques ; Gaston Gelos ; David J Hofman ; Julia Otten ; Gurnain Kaur Pasricha ; Zoe Strauss

Publication Date:

October 27, 2023

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

We examine whether changes in the distribution of household inflation expectations contain information on future inflation. We first discuss recent shifts in micro data from the US, UK, Germany, and Canada. We then zoom in on the US to explore econometrically whether distributional characteristics help predict future inflation. We find that the shape of the distribution of household expectations does indeed help predict one-year-ahead CPI inflation. Variance and skewness of household expectations’ distributions add predictive power beyond and above the median, especially in periods of high inflation. Remarkably, qualitatively, these results hold when including market-based measures and moments of the distribution of professional forecasts.

Series:

Working Paper No. 2023/224

Subject:

Frequency:

regular

English

Publication Date:

October 27, 2023

ISBN/ISSN:

9798400258152/1018-5941

Stock No:

WPIEA2023224

Format:

Paper

Pages:

32

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