Consumers Predict Inflation Better than Economists

by BigT | August 27, 2008 at 12:38 pm

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Crap! This kind of screws me since I have a degree in economics but the truth is the truth and, quite frankly, I've known this for a long time.

My trust for markets has no bounds. When I have talked about who the candidates are going to pick as their running mates I always included the latest numbers from intrade.com, a predictions market. Why? Because things are too complex to be better understood by a cadre of trained experts (i.e. a small group of people who have all gone to the same colleges, read the same books, shop at the same stores, vacation in the same places, and in many other facets of their lives are just the same) than by everyone.

Sure, the distribution for the mob, us, may be bigger than the distribution for predictions by experts but, as is seen here and in other places, the average pick by the mob is better. We collectively know more than any appointed band of pointy heads can.

On average, the consumers predicted inflation rates that were off by 1.1 percentage points. The researchers compared the results with those found with the Livingston Survey of professional economists, finding a similar error in predictions.

For instance, from 1993 through 2005, U.S. consumers as a whole were off by an average of 0.72 percentage points in forecasting the inflation rate. Over that same period, economists erred by about 0.82 percentage points.