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Disagreement in Consumer Inflation Expectations
... tion expectations are produced by the University of Michigan and the Federal Reserve Bank of Philadelphia, who publish the Survey of Consumers and the Survey of Professional Forecasters (SPF), respectively. Work done by authors such as Łyziak and Sheng (2018) documents that the Michigan and SPF forecasts of inflation are substantially different, and that possible determinants of expected inflation affect these survey measures differently. ...
... Trehan and Lynch (2013) document that recent inflation and oil prices explain more than three-quarters of the variation in one-year ahead consumer inflation expectations in the United States, United Kingdom, and Japan, while these two factors only actually accounted for roughly one-fourth of the variation in actual inflation. Łyziak and Sheng (2018) match the data from the Michigan consumer survey and the SPF survey from 1985 to 2017, and find that expectations between households and experts are substantially and persistently different. 6 Specifically, they report a weak correlation between the two series, which gets weaker still when one examines measures that account for both the mean and variance of expected inflation. ...
It is critical for the Federal Reserve to stabilize inflation expectations in order to achieve their desired inflation target. Yet, the empirical evidence documents that consumers and professional forecasters often have different views about the expected future inflation rate. Previous research demonstrates that greater newspaper coverage on inflation closes the gap between consumers' and professionals’ inflation forecasts. However, the literature only examines newspaper references to inflation, while more general references to the Fed have been overlooked. This paper fills this void, where we find some evidence that newspaper references to the Fed close the gap between consumer and professional inflation forecasts, although this effect varies by newspaper and by the way in which news coverage is measured.
Credibility is elusive, but Blinder [(2000) American Economic Review 90, 1421–1431.] generated a consensus in the literature by arguing that “A central bank is credible if people believe it will do what it says.” To implement this idea, we first measure people’s beliefs by using survey data on inflation’s expectations. Second, we compare beliefs with explicit (or tacit) targets, taking into account the uncertainty in our estimate of beliefs (asymptotic 95% robust confidence intervals). Whenever the target falls into this interval we consider the central bank credible. We consider it not credible otherwise. We apply our approach to study the credibility of the Brazilian Central Bank (BCB) by using a world-class database—the Focus Survey of forecasts. Using monthly data from January 2007 until April 2017, we estimate people’s beliefs of inflation 12 months ahead, coupled with a robust estimate of its asymptotic 95% confidence interval. Results show that the BCB was credible 65% of the time, with the exception of a few months in the beginning of 2007 and during the interval between mid-2013 throughout mid-2016.
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