Are Inflation Expectations Accurate?

By Raulin Cadet | Published Sept. 18, 2023 | Updated Sept. 18, 2023 | Topics: Inflation, USA, Expectation

In this blog post, I go into the area of consumer inflation expectations in the US. Given the effects of inflation on both people and businesses, the accuracy of these predictions is crucial.  

Concepts

The government statistics office constructed the consumer price index (CPI), whose percentage rate of change is the inflation rate. The consumer price index (CPI), to put it simply, is a measure of the costs of a selection of goods that consumers frequently purchase.  Inflation anticipation refers to the projection an economic agent makes regarding inflation for a future period, like the upcoming month.

What do economics say?

In the realm of economics, theories like the Rational Expectations Theory are fundamental to understanding how people foresee inflation. According to this theory, individuals make their predictions about inflation based on the information they have at hand. However, the Informational Frictions and Heterogeneous Expectations theory point out that not everyone has the same access to information. This lack of equal information can lead to differing and sometimes inaccurate expectations about inflation.

What Do the Numbers Say? 

When we look at inflation expectations in the United States, as measured by the University of Michigan, we gain valuable insights into the direction of inflation. Although the exact inflation rate isn't revealed, its trend and that of inflation expectations are nearly similar, as reveal by the graphic of this post.

Could you attempt to predict whether the Consumer Price Index will rise or fall by the end of this month, based on the information you have now?