Perceived Inflation Persistence

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The Survey of Professional Forecasters (SPF) has had vast influence on research related to better understanding expectation formation and the behaviour of macroeconomic agents. Inflation expectations, in particular, have received a great deal of attention, since they play a crucial role in determining real interest rates, the expectations-augmented Phillips curve and monetary policy. One feature of the SPF that has surprisingly not been explored is the natural way in which it can be used to extract useful measures of inflation persistence. This paper presents a new measure of U.S. inflation persistence from the point of view of a professional forecaster, referred to as perceived inflation persistence. It is built via the implied autocorrelation function that follows from the estimates obtained using a forecaster-specific state-space model. Findings indicate that perceived inflation persistence has changed over time and that forecasters are more likely to view unexpected shocks to inflation as transitory, particularly since the mid-1990s. When compared to the autocorrelation function for actual inflation, forecasters react less to shocks than the actual inflation data would suggest, since they may engage in forecast smoothing.