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posted on 30 August 2015

Inflation Expectations Surveys Often Miss The Mark

from the Dallas Fed

-- this post authored by Antonella Tutino

Central bankers, concerned with where inflation is headed, always search for indicators that will aid their real-time decisions. Forecasts based on the forces shaping price pressures at different periods should theoretically provide useful insight.

For example, the Federal Reserve has used survey-based inflation expectations, generally available monthly or quarterly. These gauges have appeared to outperform other indicators of inflation expectations based on market measures (often relying on prices for government bonds and related instruments).

But how do the survey-based indicators of one-year-ahead inflation expectations fare when compared with a constant 2 percent predictor of inflation?

Over the last decade in the U.S., the naïve constant prediction outperforms the forecasts of professionals, academics and households presented in the surveys. Specifically, the 2 percent, one-year ahead inflation model - mirroring the annual inflation rate target of the Federal Reserve's Federal Open Market Committee (FOMC) - generally offers the best gauge of future headline inflation and core inflation (which excludes food and energy prices).

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