Who Saw It Coming? Historical Experienceand the 2021 Inflation Forecast Failure

Dalibor Stevanovic
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Dalibor Stevanovic: University of Quebec in Montreal

No 26-02, Working Papers from Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management

Abstract: This paper studies the 2021 U.S. inflation forecasting failure. I show that the failure was primarily driven by sample composition rather than functional-form misspecification: estimation samples dominated by the Great Moderation underweight supplyshock regimes, and expectations anchored to that regime were slow to recognize the shift. Three historically informed adjustments, an intercept correction, a similarity re-estimation on 1970s data, and a kernel-weighted estimator, substantially close the forecast gap, and the gains extend to eight additional U.S. price indices. Household survey respondents over 60, whose lifetime includes the 1970s, reported higher inflation expectations from early 2021, consistent with experience-based learning; younger cohorts remained anchored to the prevailing regime. A controlled experiment with large language models conditioned on “experienced†and “young†professional personas confirms that experiential priors generate significant forecast differences under a common training leakage assumption. Across all three exercises, the source of the prior mattered more than the sophistication of the model.

Keywords: Inflation forecasting; regime change; historical analogy; experience-based learning; expectations anchoring; large language models (search for similar items in EconPapers)
JEL-codes: C22 C53 D84 E31 E37 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2026-04
New Economics Papers: this item is included in nep-his, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bbh:wpaper:26-02

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