Cognitive reflection, arithmetic ability and financial literacy independently predict both inflation expectations and forecast accuracy

Abstract

Cognitive reflection is defined as the tendency to detect and check intuitive errors and has been found to predict forecast accuracy in a range of domains. The current research demonstrates in a purpose-designed survey that a question in the Survey of Consumer Expectations serves as a test of cognitive reflection. Using this measure, I demonstrate for the first time in a time-series of inflation expectations that cognitive reflection is associated with greater forecast accuracy. I then apply this insight to interrogate the spike in inflation expectations that occurred over the year 2021. The data rule out that the spike was driven by respondents low in cognitive reflection, who are most vulnerable to overreacting to recent news. These results are insightful for the use of survey data not only in forecasting inflation but in forecasting more generally.