Professionals Inflation Forecasts: The Two Dimensions Of Forecaster Inattentiveness

Abstract

Abstract This article explores professionals’ inflation forecasts, specifically the structure of their forecast error. Recent papers considering professionals’ inflation forecast have focused on the role of forecaster inattentiveness. We consider a new additional dimension of inattentiveness which is observed when forecasters form multi-period forecasts, and implicitly their perceived momentum of inflation. The present analysis introduces a novel model that is investigated empirically using survey-based data for the US. It establishes a new structure for the professionals’ forecast error accounting for both dimensions of inattentiveness, which relates respectively to forecast updating and multi-period forecasting in each period.