Further, in our initial investigations we had established evidence that many respondents would prefer to give a range rather than a point estimate and that most households were able to answer questions about their uncertainty over future inflation. We had also found our measure of individual forecast uncertainty to be positively correlated with the width of any range of responses given to the standard point forecast questions. Thus, we added questions eliciting from our panel their subjective uncertainty about future inflation. I will show you an example of such a question in a minute. As emphasized above, anchoring forward inflation expectations is crucial for monetary policy. In the Michigan survey, information on forward inflation expectations is generated by a question asking about “the change in prices in general over the next 5 to 10 years.” Our initial exploratory work confirmed that many households were confused by this wording but that there was overwhelming evidence that long-term average expectations were being reported. Considering the rather elaborate structure of the Michigan questions shown in Chart 5, it also appears that small changes in the various challenges could lower the median response by a significant margin. Further, asking about the rate of inflation directly produced answers more consistent with the concept of forward inflation expectations of interest to central banks. Rather than replicating the Michigan long-term inflation expectation question replacing “prices in general” with the “rate of inflation” we decided to work with a medium-term explicit horizon and use only a probabilistic version of the question.
In formulating a question on wage expectations we needed to pose a hypothetical situation to gain information of direct relevance to inflation. It is easiest to illustrate this by giving you the format and exact wording of the question: We first asked individuals who reported to be working for pay how many jobs they had. We then informed them that in some subsequent questions we would ask about their MAIN job, which we defined to be the job at which they usually work the most hours. We then ask: “Suppose that, 12 months from now, you actually are working in the exact same [MAIN] job at the same place you currently work, and working the exact same number of hours. Twelve months from now, do you expect your earnings on this job, before taxes and deductions, to have gone up, or gone down, or stayed where they are now?” For those who said gone up or gone down we then asked: “By about what percent do you expect that your hourly earnings on this job, before taxes and other deductions, will have gone [UP/DOWN], 12 months from now, if you actually are working in the exact same job at the same place you currently work, and working the exact same number of hours?” As in the rest of our work we also elicited uncertainty around this wage expectation. Chart 8 shows a time series of the median response and inter-quartile range to the point prediction question along with the average uncertainty as defined above.