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Do Household Expectations Help Predict Inflation?

Author

Listed:
  • Mr. Luis Brandão-Marques
  • Mr. Gaston Gelos
  • Mr. David J Hofman
  • Ms. Julia Otten
  • Gurnain Kaur Pasricha
  • Zoe Strauss

Abstract

We examine whether changes in the distribution of household inflation expectations contain information on future inflation. We first discuss recent shifts in micro data from the US, UK, Germany, and Canada. We then zoom in on the US to explore econometrically whether distributional characteristics help predict future inflation. We find that the shape of the distribution of household expectations does indeed help predict one-year-ahead CPI inflation. Variance and skewness of household expectations’ distributions add predictive power beyond and above the median, especially in periods of high inflation. Remarkably, qualitatively, these results hold when including market-based measures and moments of the distribution of professional forecasts.

Suggested Citation

  • Mr. Luis Brandão-Marques & Mr. Gaston Gelos & Mr. David J Hofman & Ms. Julia Otten & Gurnain Kaur Pasricha & Zoe Strauss, 2023. "Do Household Expectations Help Predict Inflation?," IMF Working Papers 2023/224, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/224
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