Economics Working Paper 22120
Abstract: I study long-run series of individual and professional inflation forecasts from the University of Michigan Survey of Consumers and Livingston Survey of professional economists. I find that the average professional forecast generally outperforms the average consumer forecast. However, that superior performance is attributable exclusively to periods of low and stable inflation. During periods of high inflation and inflation regime change—both from low and stable to high inflation, and from high inflation to disinflation—the average consumer forecast is more accurate and rational (unbiased, with serially uncorrelated errors) and efficient (fully exploits available information). I find 3.5% inflation to be a critical threshold above which consumers rationally predict inflation. Professional forecasters affiliated with commercial banks and labor organizations generally outperform other professionals during periods of price stability, with the latter also exhibiting less bias and more rationality and efficiency than other professionals during periods of inflation regime change.