RDP 2016-02: Disagreement about Inflation Expectations 8. Conclusions

This paper provides some of the first evidence for Australia on the behaviour of disagreement about inflation expectations, contributing to a growing international literature studying forecast disagreement for macroeconomic variables. Our findings have implications for the anchoring of inflation expectations and the manner in which agents form and update their expectations. While the behaviour of disagreement does not fit neatly within any particular model, we do find evidence consistent with information rigidities.

In summary, our key findings are:

• There has been a decline in disagreement in inflation expectations among professional forecasters since the 1980s and early 1990s. This is consistent with inflation expectations having become better anchored at the RBA's inflation target since the adoption of inflation targeting in 1993.
• Disagreement responds little to most macroeconomic news surprises. However, disagreement about inflation over the year ahead does rise in response to deviations in current inflation from the midpoint of the RBA's inflation target. This is consistent with the presence of information rigidities, but also imperfect credibility of the inflation target.
• Consumers' inflation expectations appear more weakly anchored than professionals: disagreement among consumers about inflation expectations is an order of magnitude larger than among professional forecasters, and there is no evidence of a decline in disagreement since 1995.
• There is a strong relationship between disagreement and the mean level of inflation expectations for consumers, but not for professional forecasters. This implies that reductions in consumer inflation expectations prior to 1995 may have been associated with a decline in disagreement.
• There are persistent differences in consumer inflation expectations across demographic groups, which appear partly related to personal inflation experience. However, these differences explain only a small fraction of the overall disagreement in consumer inflation expectations.
• Consumer inflation expectations are sensitive to certain salient prices, such as past changes in petrol prices. This is inconsistent with pure sticky-information-type models of expectations formation, which assume that updating of expectations is time-dependent.
• On a methodological level, we introduce a new technique to remove noise from individual response level consumer inflation expectations data.
• We find only weak evidence that disagreement may be a useful proxy for mean forecast uncertainty. This suggests that there is not meaningful predictable time variation in inflation forecast confidence bands.