Prediction Markets Outperform Wall Street in Inflation Forecasts: Kalshi's In-Depth Study

Inflation forecasts in financial markets are a critical decision-making mechanism for central banks and investors. A comprehensive study conducted by Kalshi reveals that prediction markets hold a significant advantage over traditional economist consensus in this domain. Over a 25-month period from early 2023 to mid-2025, market-based forecasts demonstrated an average error rate that was 40% lower than Wall Street consensus estimates.

October Inflation Forecast: Data Speaks

Kalshi’s research examined predictions related to the annual changes in the Consumer Price Index (CPI). When it comes to October inflation forecasts, the sensitivity of prediction markets becomes more apparent. Particularly during periods when actual figures sharply deviate from market expectations, Kalshi’s markets have provided results closer to reality, surpassing traditional consensus by as much as 67%.

According to the study, when the difference between market opinion and general expectation in CPI forecasts exceeds 0.1 points and the data is released within a week, there is an 80% chance of significant deviation in the actual inflation data. This represents a notable increase compared to the baseline of 40%.

The Superiority of Market-Based Predictions: Wisdom of the Crowd

Prediction markets adopt a different approach from the set of models and assumptions used by traditional economists. By aggregating observations from various individual investors motivated by financial incentives, markets create a dynamic and multi-layered pool of information. This “wisdom of the crowd” effect becomes especially valuable when economic conditions change.

In Kalshi’s model, each participant has a direct financial stake in correctly predicting outcomes and earning rewards. This is radically different from the reputation constraints and organizational pressures faced by institutional forecasters. Market investors, on the other hand, are rewarded or penalized solely based on their performance.

The Value of Prediction Markets During Uncertain Times

One of the key findings of the research is that prediction markets are most valuable for corporate decision-makers during periods of high economic uncertainty. When shocks and unexpected developments occur, traditional methods often have limited speed and flexibility in response, while the market mechanism prices in new information in real time.

A previous study by Polymarket found similar results. According to that research, the platform could predict future events with 90% accuracy one month in advance, reaching 94% accuracy just hours before the event occurred. However, risks such as artificial overvaluation, herd mentality, and liquidity issues should not be overlooked, as they can lead to overestimating probabilities.

Kalshi’s Rapid Growth and Industry Dynamics

Kalshi has become one of the competing platforms in the prediction market economy. In January 2025, it integrated with the crypto wallet platform Phantom, gaining access to millions of new users. During the same period, the company raised $1 billion at a valuation of $11 billion, clearly demonstrating investor interest in the sector.

Competitor Polymarket has also conducted funding discussions at valuations between $12 billion and $15 billion in recent months. This indicates how financially prominent the prediction markets sector has become.

Future Outlook: Beyond Inflation Forecasts

Kalshi’s research shows that market-based prediction is not limited to inflation measurement alone. The findings highlight the importance and future potential of prediction markets as part of a comprehensive portfolio of risk management and policy planning tools.

“The sample size of shocks may be small, but the pattern is clear: when the environment becomes most challenging, the advantage of gathering information in markets becomes most valuable,” is the overarching conclusion of this research. Corporate decision-makers are increasingly viewing prediction market signals as a complement to traditional approaches when it comes to inflation forecasts and other macroeconomic projections.

During critical economic periods like October’s inflation forecast, real-time predictions supported by financial incentives provided by these market mechanisms become an indispensable source of information for policymakers and risk managers.