Household uncertainty predicts inflation forecast errors
Subjective uncertainty reported by households reliably predicts the accuracy of their inflation forecasts, according to a study by Paul Hubert and Rose Portier analyzing nearly one million responses across four euro area and US surveys.
Real signals from household doubt
Analyzing nearly one million responses from four surveys across the euro area and the United States, researchers Paul Hubert and Rose Portier examined whether subjective uncertainty predicts forecast accuracy.
For professional forecasters in the ECB and Federal Reserve Bank of Philadelphia surveys, the link between uncertainty and error vanishes once individual and time fixed effects are accounted for.
In contrast, for households in the ECB Consumer Expectations Survey and the Federal Reserve Bank of New York Survey of Consumer Expectations, expressed uncertainty strongly correlates with larger forecast errors across all age, income, gender, and education cohorts.
The asymmetric fear of rising prices
The analysis reveals a marked asymmetry: subjective uncertainty is at least twice as strong a predictor of error when households overestimate inflation compared to when they underestimate it.
This disparity persists regardless of demographic factors or the 2020 to 2022 inflation surge.
The authors argue that symmetric rational inattention models cannot explain this result, pointing instead to behavioural mechanisms where consumers over-extrapolate perceived inflationary signals.
A vital gauge for central bankers
Central banks often treat consumer surveys as noisy sentiment rather than reliable data.
Proving that household uncertainty tracks forecast errors transforms density questions into a vital policy instrument.
Policymakers ignoring this behavioral skew risk misjudging public expectations during inflation shifts.