Recent evidence on the accuracy and rationality of popular inflation forecasts

This paper compares the accuracy and examines the rationality of inflation forecasts extracted from U.S. Treasury bill yields, the mean forecast of surveys conducted by the Institute for Social Research, and the predictions from a rolling time‐series model. Measures of realized inflation include both the Consumer Price Index reported during the period and a revised CPI series (CPIX) that replaces the mortgage interest rate with the recently adopted ‘rental equivalence’ component. Inferences about accuracy and rationality depend upon both the measure of inflation and the period studied. The findings suggest that survey forecasts should be used when turbulent variation in the unobservable expected real rate of interest obscures the measurement of the market's expectation of inflation.