Rationality of the Michigan Price Expectations Data: Note

Abstract

The use of survey data as a source of information with regard to inflationary expectations has provided important insights into the inflationary process. Although Livingston's data set is apparently the most widely used, de Menil and Bhalla [1] have recently utilized data from the Survey Research Center (SRC) at the University of Michigan to construct a time series of expected inflation. We have uncovered a disturbing feature of this series. Over the most recent portion of the period covered by the time series, a subperiod for which direct observations of inflationary expectations exist, the expectations data are rational. However, over the earlier part of the period, de Menil and Bhalla had to construct expectations data from cruder survey information. When we test the entire expectations series, we find that the data are not rational, leading us to question the manner in which the early part of the expectations series was constructed. The SRC time series on inflationary expectations is based upon the following survey questions: