Crystal ball reflecting inflation trends in a currency-filled cityscape.

Decoding Inflation: Why Your Forecasts Might Be Leading You Astray

Beau Callahan in Business & Economy June 2025 • 4 min read.

"Unraveling the complexities of inflation forecasting and how professional insights can help you make better financial decisions."

In today's economy, everyone's keeping an eye on inflation. It affects everything from your grocery bills to the interest rates on your loans. Central banks work hard to manage inflation, but it's a tricky business, and a big part of the challenge lies in predicting what inflation will do next. These expectations can be difficult to nail down, but new methods help us get a grip on where prices might be headed.

Inflation expectations offer insight into whether current strategies to stabilize prices will be successful. As economists dig deeper, they're using new resources that include financial market data, statistical models, economic models, and surveys. Among the most insightful of these is the Survey of Professional Forecasters (SPF), which asks experts where they see inflation going. Their insights are useful for assessing real and future financial landscapes.

This article cuts through the complexity, inspired by a recent study from the Australian National University, and explains why understanding inflation predictions matters to you. By tapping into the wisdom of professional forecasters, you can better prepare for the twists and turns of the economy. Let’s dive into how these experts see the future and how it might impact your financial decisions.

How the Pros Forecast Inflation

Crystal ball reflecting inflation trends in a currency-filled cityscape.

The pros use a blend of different factors to predict inflation. One approach combines two models: the unobserved components (UC) model and the sticky information (SI) model. The UC model looks at trend and temporary factors influencing inflation, and the SI model considers that not everyone updates their information at the same rate. The information people are relying on can be ‘sticky’ or outdated. This is something to consider in personal finances and even broader, when analyzing the health of the economic landscape.

These models also account for the fact that inflation doesn't always move smoothly. The pros factor in things like time-varying inflation gap persistence, to gauge how long inflation might stray from its normal levels. They also look at stochastic volatility, which means the volatility of inflation can change. Think of this like predicting the stock market, some days, price movements may be calm, while on other days, prices may rise or fall more dramatically.

Here are some of the techniques they use:

Bayesian tools: They use data and probability to forecast.
Particle filters: Advanced algorithms help to make better predictions.
Markov chain Monte Carlo: To model the uncertainty of economic activity.

These tools help create a nonlinear state space model. This model is estimated using Bayesian techniques grounded in the particle filter, which are kinds of sequential Monte Carlo methods. Estimates preferred by the data are based on the joint DGP of time-varying frequency of SI forecast updating and a SW-UC model with time-varying persistence. This approach helps everyone make better financial decisions.

Applying Expert Insights to Your Finances

The next time you read about inflation forecasts, remember that experts are considering various factors, from trend and temporary influences to how quickly information spreads. By understanding these dynamics, you're better equipped to interpret financial news and make informed decisions. Paying attention to professional insights can offer a clearer view of the economic landscape, helping you navigate the ups and downs with greater confidence.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.2139/ssrn.2578763, Alternate LINK

Title: Inflation And Professional Forecast Dynamics: An Evaluation Of Stickiness, Persistence, And Volatility

Journal: SSRN Electronic Journal

Publisher: Elsevier BV

Authors: Elmar Mertens, James M. Nason

Published: 2015-01-01

Everything You Need To Know

How do professional forecasters predict inflation?

Professional forecasters utilize a combination of the unobserved components (UC) model, which assesses trend and temporary factors, and the sticky information (SI) model, which accounts for how quickly people update their information. They also consider time-varying inflation gap persistence to estimate how long inflation might deviate from its typical levels, and stochastic volatility to understand how the volatility of inflation can change over time. These techniques are crucial for understanding the overall economic landscape.

What is the Survey of Professional Forecasters (SPF) and why is it important?

The Survey of Professional Forecasters (SPF) polls experts to gather insights on future inflation trends. These insights are valuable because they provide a professional assessment of the financial landscape, aiding in understanding potential future economic conditions. This understanding can equip individuals and businesses to make more informed financial decisions and better prepare for future economic scenarios.

What specific tools do professional forecasters use to predict inflation?

Bayesian tools, particle filters, and Markov chain Monte Carlo methods are some of the tools used. Bayesian tools use data and probability for forecasting, particle filters are advanced algorithms that help to make better predictions, and Markov chain Monte Carlo is used to model the uncertainty of economic activity. These tools are essential for creating a nonlinear state space model, which is estimated using Bayesian techniques.

What does the sticky information (SI) model tell us about inflation forecasting?

The sticky information (SI) model acknowledges that not everyone updates their information at the same rate. This means that some people might be relying on outdated information when making financial decisions. This is important because it can lead to delayed reactions to economic changes, which in turn can impact personal finances and broader economic stability. The model suggests that the speed and frequency with which individuals and institutions update their economic outlooks can influence the overall effectiveness of monetary policy and economic forecasting.

What does stochastic volatility mean in the context of inflation forecasting?

Stochastic volatility refers to the idea that the volatility of inflation itself can change over time. This means that there are periods when inflation rates are relatively stable and predictable, and other times when they fluctuate wildly. Understanding stochastic volatility is crucial for accurately forecasting inflation because it helps to account for the changing levels of uncertainty in the economy. It highlights the need for models that can adapt to these shifts in volatility to provide more reliable predictions.