Whose inflation expectations forecast best? Alternatives based on survey and financial data

Lars Svensson (1997) argued that inflation targeting should be called inflation forecast targeting, capturing the fact that monetary policy is necessarily forward looking. Inflation forecast performance is therefore a critical element for good conduct in monetary policy. As more measures of inflation expectations have become available, it is worth asking whether some are better than others at forecasting inflation and whether the long-held belief that forecast averaging outperforms individual forecasts continues to hold. We consider five sources of inflation forecasts for South Africa, including three unique quarterly surveys of firms, financial analysts and trade unions. We find that a linear combination of forecasts obtained from a factor model can improve the accuracy of forecasting over alternative forms of aggregation.