Do Household Expectations Help Predict Inflation?
IMF Working Papers, October 27, 2023
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- Do Household Expectations Help Predict Inflation?
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Bibliographic details
- Authors: Luis Brandao Marques, Gaston Gelos, David J Hofman, Julia Otten, Gurnain Kaur Pasricha, Zoe Strauss
- Published: October 27, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400258152.001
Overview
- Research question: Whether changes in the distribution of household inflation expectations contain information on future inflation.
- Geographic scope in descriptive analysis: US, UK, Germany, and Canada.
- Focused econometric analysis: United States.
- Key takeaway: The shape of the distribution of household expectations helps predict one-year-ahead CPI inflation.
Main findings
- Variance and skewness of household expectations’ distributions add predictive power beyond and above the median.
- Predictive power of distributional moments is especially pronounced in periods of high inflation.
- Qualitatively, results hold when including market-based measures and moments of the distribution of professional forecasts.
- The predictive horizon emphasized: one-year-ahead CPI inflation.
Data and methods
- Uses micro data on household inflation expectations from the US, UK, Germany, and Canada for descriptive discussion.
- Employs econometric analysis focusing on the US to test whether distributional characteristics of household expectations predict future inflation.
- Distributional characteristics highlighted: variance and skewness (in addition to median).
Robustness and comparative results
- Findings regarding the added predictive power of variance and skewness remain when market-based measures are included.
- Findings regarding the added predictive power of variance and skewness remain when moments of the distribution of professional forecasts are included.
- Results are qualitatively consistent across the checks reported.
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