What can laymen do just as well as experts? Predict inflation rates.
This was the unlikely conclusion found from a research project published in “The Economic Record,” an Australian academic journal co-authored by Alan Grant, associate professor of business and economics, and Lloyd Thomas, head of the department of economics at Kansas State University.
“The professionals are really good,” Grant said. “It’s just that consumers are really good, too.”
Grant said he and his Ph.D. dissertation adviser, Thomas, had been working on the study for about five years, publishing five or six similar articles leading up to the most recent one published in June. The latest article sparked national attention when it was picked up by several national news sources, including MSNBC and the Wall Street Journal.
The Kansas State University marketing and research department sent a short press release to The Associated Press, and Grant said that is why this article received so much more attention than the others, especially since he didn’t consider the findings to be exceptionally interesting.
“We’re not particularly reinventing any wheels, just taking it off road a little further than others,” Grant said.
Public Relations Director Steve Rottinghaus said that while KSU took the lead in making this project known, Baker faculty usually go through him.
“I think the reason (Grant’s paper) was so popular is that it relates to so many people,” Rottinghaus said.
While inflation may seem like an abstract term with no bearing on real life, Grant said inflation predictions have a large effect on the average American.
“If you expect the price of the things you buy to rise by 20 percent, then when you negotiate your salary; you ask for a 20-percent increase just to stay even, plus a raise on top of that,” Grant said. “If you expect inflation to be high, even if it turns out not to be, then employers have to pay you more, then prices have to rise, and it’s a self-fulfilling prophecy.”
Thomas said being aware of the inflation rate is vital for investors. Money sitting in a savings account drawing a low amount of interest could result in losing money when the inflation rate surpasses the rate of interest.
For Thomas the results of the study were surprising, but they made sense to him.
“Households go to the grocery store, go to the gas station, are very aware of what’s going on,” he said. “They know when gas and food prices go up, and they’ve gotten squeezed in the last year. Households are in tune and watch the news. They notice on their own.”
Grant and Thomas studied American and Australian consumers through large surveys conducted by other sources, finding that on average consumers are slightly more accurate than professional economists.
“Survey data is freely available,” Grant said. “We used their data, and we had to construct the corresponding series of actual inflation. That means we have information from consumers about what they think inflation is going to be, and we have to look and see what it actually was.”
The results showed that both experts and the public were surprisingly accurate.
“Households were off by less than one percent,” Thomas said. “Experts were off by slightly more, but it could just be a blip in the data. Statistically, it’s a wash.”
Grant said while consumers are holding their own with economists in this area, the professionals shouldn’t be written off.
“We don’t want to be critical of our professionals,” he said. “The median filters out a lot of the random answers, so the professionals are more consistent.”