Biased Inflation Forecasts

Recent work finds that people's beliefs about inflation are systematically upward biased. Since inflation expectations are central to the efficacy of monetary policy, understanding these expectations, and their biases, is important for policy. While one can always find preference-based explanations for bias, the fact that more informed agents have less upward bias, suggests some connection to information, as opposed to preferences. This paper proposes a rational Bayesian explanation for the bias: Agents with parameter uncertainty over positively-skewed distributions have a positive bias in their forecast. We use inflation and survey data to show that this mechanism can quantitatively explain the magnitude of the bias. The model implies that communicating about inflation skewness may be an important dimension of forward guidance.