Measuring inflation expectations: How the response scale shapes density forecasts

In density forecasts, respondents are asked to assign probabilities to a response scale with pre‐specified ranges of inflation. In two large‐scale experiments, one conducted in the US and one in Germany, we show how the specifics of the response scale determine the results: Shifting, compressing, or expanding the scale leads to shifted, compressed, and expanded forecasts. Quantifying this effect using the scale most widely used among central banks, we find that mean forecast, uncertainty, and disagreement can vary by several percentage points. Density forecasts may severely misestimate the “true” inflation expectations, and may generate spurious changes in reported inflation uncertainty. The analysis suggests several ways to reduce this bias.