Measuring disagreement in UK consumer and central bank inflation forecasts, February 2011

We provide a new perspective on disagreement in in‡ation expectations by examining the full probability distributions of UK consumer in‡ation forecasts based on an adaptive bootstrap multimodality test. Furthermore, we compare the in‡ation forecasts of the Bank of England’s Monetary Policy Committee (MPC) with those of UK consumers, for which we use data from the 2001-2007 February GfK NOP consumer surveys. Our analysis indicates substantial disagreement among UK consumers, and between the MPC and consumers, concerning one-year-ahead in‡ation forecasts. Such disagreement persisted throughout the sample, with no signs of convergence, consistent with consumers’ in‡ation expectations not being ’well-anchored’ in the sense of matching the central bank’s expectations. UK consumers had far more diverse views about future in‡ation than the MPC. It is possible that the MPC enjoyed certain information advantages which allowed it to have a narrower range of in‡ation forecasts. Keywords: Adaptive kernel method, adaptive multimodality test, consumer survey, in‡ation forecasts, nonparametric density estimation. JEL Classi…cation: C14, C82, E31, E58 The views expressed in this paper belong to the authors and do not represent those of the Bank for International Settlements (BIS). We would like to thank seminar participants at the BIS for helpful comments.