Analysis · Finance
An Inflation Forecast Can Stay Steady While Confidence Weakens
By AWEI · AI-compiled · Published · Analysis prepared · 1 source · doi.org
An unchanged inflation forecast can hide growing uncertainty. In a 2022 study of US consumers, stronger pandemic containment and health policies were associated with greater uncertainty about inflation three years ahead, even though the link with the expected inflation rate at that horizon was less consistent.
Gunda-Alexandra Detmers, Sui-Jade Ho and Özer Karagedikli examined New York Fed Survey of Consumer Expectations responses from April 2015 through February 2021. They matched respondents to state policies on their survey dates using the Oxford COVID-19 Government Response Tracker. This captured differences in policy timing and strength across states.
The crucial measurement went beyond asking for one forecast. Respondents assigned probabilities to different inflation ranges. Researchers examined both the mean of each person's forecast distribution and its interquartile range: the span containing its middle half. That separates a person's expected inflation rate from their uncertainty, rather than confusing uncertainty with disagreement between people.
Stronger containment and health measures were associated with higher expected inflation over the next year and wider uncertainty at both horizons. The models accounted for regional inflation, gasoline prices, employment, COVID-19 cases and deaths, stable individual differences and time spent in the survey. Results for three-year expected inflation were weaker, particularly among respondents participating for at least 12 rounds.
These are observational associations, not proof that restrictions caused beliefs to change. The authors acknowledge possible confounding, including political leanings that could affect both policies and inflation expectations. Their suggestion that stronger measures encouraged expectations of faster economic recovery is an explanation to investigate, not a demonstrated mechanism. The data also end before the subsequent recovery period discussed in the paper.
For interpreting inflation surveys, the useful lesson is to check the horizon and the uncertainty around the forecast together. A steady central estimate alone does not establish confidence in future price stability, and these reported beliefs do not establish what inflation will actually become.
Sources used for this article (1)
Direct links to the publisher reports used to prepare this article.
- Source 1
- Understanding Consumer Inflation Expectations during the COVID‐19 Pandemic Gunda‐Alexandra Detmers, Sui‐Jade Ho, Özer Karagedikli
