## Diversity, Uncertainty, and
Accuracy of Inflation Forecasts

##### by Stephen K. McNees
with Lauren K. Fine

July/August 1994

Uncertainty is a key concept in both economic theory and economic
practice. Yet, economic forecasts are usually stated as single numbers, or
"point estimates," that convey no information about the full array of
possible outcomes. The dispersion of individual forecasters' point estimates
is often used as an approximation of forecast uncertainty, even
though it is neither logically nor empirically related. In fact, the diversity
of point estimates is a poor guide to the accuracy of a point estimate
forecast.

This article examines explicit estimates of forecast uncertainty,
taken from the Survey of Professional Forecasters. It concludes that
most individuals' estimates of ~nflation and real GNP uncertainty are
well calibrated at both the 50 and 90 percent, though not at the 100
percent, confidence intervals. In contrast, the mean probability distribution
of all respondents is well calibrated at all three intervals. Despite
their overall reliability, the uncertainty estimates are not correlated with
the accuracy of point estimate forecasts. This lack of correlation should
not be construed as evidence that uncertainty cannot be reliably anticipated,
however.

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