On the Relative Performance of Inflation Forecasts

Abstract

Inflation expectations constitute important components of macroeconomic models and monetary policy rules. We investigate the relative performance of consumer, professional, market-based, and model-based inflation forecasts. Consistent with the previous literature, professional forecasts most accurately predict one-year-ahead year-over-year inflation. Both consumers and professionals overestimate inflation over their respective sample periods. Market-based forecasts as measured by the swap market breakeven inflation rates significantly overestimate actual inflation; Treasury Inflation-Protected Securities market breakeven inflation rates exhibit no significant bias. We find that none of the forecasts can be considered rationalizable under symmetric loss. We also find that each forecast has predictive information that is not encompassed within that of another. (JEL E31, E37).