Survey measures of expected inflation and the inflation process

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Survey measures of expected inflation and the inflation process

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Bharat Trehan

Abstract

This paper uses data from surveys of expected inflation to learn how the expectations formation processes of households and professionals have changed following a change in the inflation process in the early part of this decade. 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. Professional forecasters do appear to have changed how they predict inflation in recent years, in a way that appears consistent, at first, with the finding that the ‘core’ inflation process has not changed as much as the ‘headline’ inflation process has. But the professionals appear to be placing too much weight on lagged core inflation data, and over recent sample periods professional forecasts of headline CPI inflation are noticeably worse than the alternatives. Some other evidence is consistent with the hypothesis that they are now focusing on the core CPI.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2009-10.

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Date of creation: 2009
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Handle: RePEc:fip:fedfwp:2009-10

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This paper has been announced in the following NEP Reports:

NEP-ALL-2009-07-03 (All new papers)
NEP-CBA-2009-07-03 (Central Banking)
NEP-MAC-2009-07-03 (Macroeconomics)
NEP-MON-2009-07-03 (Monetary Economics)

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