How good are economists at forecasting CPI?

Market economists are taking a pasting worldwide for not predicting the global financial crisis. But how good is the profession at more bread-and-butter tasks, such as forecasting economic data?

In Australia, Reuters surveys 15-25 economists ahead of each quarterly CPI figure. A check back over analyst forecasts for the past 17 years shows:

  • the median forecast mostly gets the direction right, but tends to miss the highs and lows of the cycle
  • the median forecast is pretty close about half the time
  • but about a quarter of the time it's well off the mark
  • and of those – about 10 percent of the time – it's not even close 

Forecasts matter because financial markets closely watch surveys of analyst expectations for major data, and the consensus forecast is priced into the market well before official figures are released. So any big swings in the exchange rate or bill prices on the day are usually due to whether the result matches expectations, rather than the figure itself.

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