Disagreement on Inflation Expectations in G7-Countries

We investigate a new survey data set from Consensus Economics containing disaggregate expert inflation forecasts for all G7-countries. We find that the precision of forecasts has risen in the late 1990s as inflation became more stable. The central tendency of inflation forecasts are found to be biased for about half of the countries in the study. Furthermore, we find that the forecasts could have been systematically improved by using available information on macroeconomic variables (including inflation, unemployment and interest rates). All in all, the results call for a rejection of the efficiency hypothesis. There is some evidence that the cross-sectional dispersion of forecasts rises with the inflation rate and during recessions - which is in line with theories of different information sets and the possibility that forecasters have different views on the strength of propagation mechanisms in mind. We conclude that central banks should target a low and stable inflation rate to minimize uncertainty attached to inflation expectations.