Evaluating Density Forecasts of Inflation : The Survey of Professional Forecasters

Since 1968, the Survey of Professional Forecasters has asked respondents to provide aquot; complete probability distribution of expected future inflation. We evaluate the adequacy ofquot; those density forecasts using the framework of Diebold, Gunther and Tay (1997). The analysisquot; reveals several interesting features of the density forecasts in relation to realized inflation including several deficiencies of the forecasts. The probability of a large negative inflationquot; shock is generally overestimated, and in more recent years the probability of a large shock ofquot; either sign is overestimated. Inflation surprises are serially correlated eventually adapt. Expectations of low inflation are associated with reduced uncertainty. Thequot; results suggest several promising directions for future research