In a new blog post, the Bank of France finds that households’ reported uncertainty contains meaningful information about the accuracy of their inflation forecasts, while professional forecasters’ uncertainty does not after accounting for individual characteristics and macroeconomic conditions. The analysis draws on nearly 1 million observations from four euro area and U.S. surveys of households and professional forecasters. For households, greater uncertainty than usual and relative to peers is associated with larger forecast errors across demographic groups. The relationship is asymmetric: uncertainty is at least twice as strong a predictor of error when households overestimate inflation as when they underestimate it. This pattern appears in both the euro area and the United States and is not explained by the 2020-2022 high inflation period or differences in household composition, pointing to behavioral biases in how some households process signals of rising prices. The findings indicate that periods of elevated household uncertainty may also be periods when inflation expectations are less reliable for central bank monitoring.
Bank of France finds household uncertainty predicts inflation forecast errors, especially overestimates
The Bank of France finds that households’ reported uncertainty predicts the accuracy of their inflation forecasts, unlike uncertainty reported by professional forecasters after individual and macroeconomic effects are controlled for. Uncertainty is at least twice as informative when households overestimate inflation as when they underestimate it. Elevated household uncertainty may therefore signal less reliable inflation expectations.