Forecasting the South African inflation rate: On asymmetric loss and forecast rationality

- We study the formation of inflation expectations in South Africa.
- Using micro-level data, we find mixed evidence of an asymmetric loss function.
- Inflation forecasts are often in line with forecast rationality.
- Evidence of an asymmetric loss function is stronger when we study pooled and sectoral data.
- We find strong evidence against forecast rationality when we study pooled and sectoral data.

Using forecasts of the inflation rate in South Africa, we study the rationality of forecasts and the shape of forecasters' loss functions. When we study micro-level data of individual forecasts, we find mixed evidence of an asymmetric loss function, suggesting that inflation forecasters are heterogeneous with respect to the shape of their loss functions. We also find strong evidence that inflation forecasts are in line with forecast rationality. When we pool the data and study sectoral inflation forecasts of financial analysts, trade unions and the business sector, we find evidence for asymmetry in the loss function and against forecast rationality. Upon comparing the micro-level results with those for pooled and sectoral data, we conclude that forecast rationality should be assessed based on micro-level data, and that freer access to this data would allow a more rigorous analysis and discussion of the information content of the surveys.