New Zealand’s central bank has determined that households’ view of future inflation is more informative than the expectations of businesses and economists when it comes to predicting headline inflation.
Of its suite of measures, the survey of one-year household inflation expectations “demonstrates the strongest predictive ability,” the Reserve Bank said in an analytical note published Wednesday in Wellington. The bank used statistical models to reach its conclusion after sampling a mix of inflation surveys.
Most analysts track the inflation component in the RBNZ’s quarterly survey of business expectations as a preferred indicator.
In the first quarter last year, that survey showed one-year inflation expectations of 4.4%. By comparison, the RBNZ survey of households at that time showed average one-year inflation expectations of 6.3% — much closer to the actual reading of 6.7% in the first quarter of this year.
Historically, the household survey has had higher outcomes than the business survey.
“The upward bias of household expectations relative to CPI inflation has led to a focus on business surveys as a main source of information about inflation expectations,” the RBNZ said in today’s note. “It is now apparent that there is useful information about future inflation in a wider range of expectations surveys than what was previously assumed. One-year RBNZ survey household inflation expectations add the most value to forecasting headline inflation.”
