1. European Commission
Directorate General Economic and Financial Affairs
The forecasting horizon of inflationary expectations and perceptions in the EU –
Is it real 12 months?
Presentation by Staffan Lindén
Directorate of Economic Studies and Research
Third Joint EC-OECD Workshop on International Developments of BCTS
12 November 2007, Brussels
European Commission 2007

2. Purpose
To examine the forecast horizon used by respondents to consumer surveys
Inflation expectations, forecasts
Inflation perceptions, backcasts
Respondents are asked about a forecast for 12 months ahead
For which horizon respondents actually give the best forecast, is an open question
European Commission 2007

3. Data – Survey questions
Data come from the Joint Harmonised Programme of Consumer Surveys
Quantitative price questions
By how many percent do you expect consumer prices to go up/down in the next 12 months?
By how many percent do you think that consumer prices have gone up/down over the past 12 months?
European Commission 2007

4. Data – Aggregates Perceived and expected inflation
Monthly averages for 18 countries
12 countries from the euro area
Answers higher than +95% or lower than -95% are truncated to +/-95%
Monthly HICP inflation rates are used as reference series
European Commission 2007

5. Methodology I
We examine the forecast errors at different leads and lags
Mean error
Root mean square error
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6. Stylised illustration of expected results
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7. Methodology II 25 month lead-lag window Expectation: 0 to +24 months
Perceptions: -12 to +12
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8. Findings – Expectations, U-shapes
European Commission 2007

9. Findings – Expectations
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10. Summary Findings – Expectations
8 countries with U-shapes within in the 0 to +24 month window
Average forecast horizon is 13 months
Another 5 if the lead-lag window is shifted
The forecasts improve by 0.6 of a percentage point
The countries inflation history is not an explaining factor
European Commission 2007

11. Findings – Perceptions, U-shapes
European Commission 2007

12. Findings – Perceptions
European Commission 2007

13. Findings – Perceptions
European Commission 2007

14. Summary Findings – Perceptions
4 countries with U-shapes within in the -12 to +12 month window
Average forecast horizon is 13 months
Another 8 if the lead-lag window is shifted
The forecasts improve by of a percentage point
The countries inflation history is not relevant
European Commission 2007

15. Concluding remarks This is preliminary work that needs to be refined
Include all available countries
Include other measures e.g. correlations
Tests
Concerns: the euro changeover
Suggestions are welcome
European Commission 2007