Trust the experts? The performance of inflation expectations, 1960–2023

Abstract

Using the oldest continuous surveys of U.S. inflation expectations, I find that when inflation is low, the average professional forecaster is generally rational (unbiased, with serially uncorrelated errors) and efficient (exploits available information), and inflation moves one-for-one with their expectations, whereas the average consumer is biased, underreacts to inflation, and inflation moves independently of their expectations. In contrast, when inflation is high the average consumer is generally unbiased, rational, and efficient, and inflation moves one-for-one with their expectations, while the opposite is true of professionals. Neither the median consumer nor median professional is fully rational and efficient, with the consumer underreacting when inflation is low and overreacting when inflation is high. However, inflation moves one-for-one with the median consumer forecast when inflation is high. Results are consistent with an inflation process characterized by two regimes—a low-inflation regime in which consumers are inattentive, and a high-inflation regime in which consumers are highly attentive and inflation moves with their expectations.¹