Inflation and professional forecast dynamics: an evaluation of stickiness, persistence, and volatility

This paper studies the joint dynamics of real-time U.S. inflation and average inflation predictions of the Survey of Professional Forecasters (SPF) based on sample ranging from 1968Q4 to 2017Q2. The joint data generating process (DGP) comprises an unobserved components (UC) model of inflation and a sticky information (SI) prediction mechanism for the SPF predictions. We add drifting gap inflation persistence to a UC model in which stochastic volatility (SV) affects trend and gap inflation. Another innovation puts a time-varying frequency of inflation forecast updating into the SI prediction mechanism. The joint DGP is a nonlinear state space model (SSM). We estimate the SSM using Bayesian tools grounded in a Rao-Blackwellized auxiliary particle filter, particle learning, and a particle smoother. The estimates show that (i) longer horizon average SPF inflation predictions inform estimates of trend inflation; (ii) gap inflation persistence is procyclical and SI inflation updating is frequent before the Volcker disinflation; and (iii) subsequently, gap inflation persistence turns countercyclical and SI inflation updating becomes infrequent.