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A Framework for Forecasting the Components of the Consumer Price Index: application to South Africa

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  • Janine Aron
  • John Muellbauer
  • Coen Pretorius

Abstract

Inflation is a far from homogeneous phenomenon, but this fact is ignored in most work on consumer price inflation. Using a novel methodology grounded in theory, the ten sub-components of the consumer price index (excluding mortgage interest rates, or CPIX) for South Africa are modeled separately and forecast, four quarters ahead. The method combines equilibrium correction models in a rich multivariate form with the use of stochastic trends estimated by the Kalman filter to capture structural breaks and institutional change. This research is of considerable practical use for monetary policy, allowing sectoral sources of inflation to be identified. Aggregating the forecasts of the components with appropriate weights from the overall index, potentially indicates the gains to be made in forecasting the idiosyncratic sectoral behaviour of prices, over forecasting the overall consumer price index.

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Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2004-07.

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Date of creation: 2004
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Handle: RePEc:csa:wpaper:2004-07

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  1. Zellner, Arnold & Tobias, Justin, 2004. "A Note on Aggregation, Disaggregation and Forecasting Performance," Staff General Research Papers, Iowa State University, Department of Economics 12371, Iowa State University, Department of Economics.
  2. Christopher A. Sims, 1996. "Macroeconomics and Methodology," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(1), pages 105-120, Winter.
  3. Michael F. Bryan & Stephen G. Cecchetti, 1999. "Inflation And The Distribution Of Price Changes," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 81(2), pages 188-196, May.
  4. Johannes Fedderke & Chandana Kularatne & Martine Mariotti, 2005. "Mark-up Pricing in South African Industry," Working Papers, Economic Research Southern Africa 01, Economic Research Southern Africa.
  5. Janine Aron & John Muellbauer & John Muellbauer, 2000. "Personal and Corporate Saving in South Africa," Economics Series Working Papers, University of Oxford, Department of Economics WPS/2000-21, University of Oxford, Department of Economics.
  6. Clements, Michael P. & Hendry, David F., 1996. "Multi-Step Estimation for Forecasting," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 447, University of Warwick, Department of Economics.
  7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  8. Weiss, Andrew A., 1991. "Multi-step estimation and forecasting in dynamic models," Journal of Econometrics, Elsevier, Elsevier, vol. 48(1-2), pages 135-149.
  9. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  10. J.W. Fedderke & E. Schaling, 2005. "Modelling Inflation In South Africa: A Multivariate Cointegration Analysis," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 73(1), pages 79-92, 03.
  11. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
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Cited by:
  1. Janine Aron & John Muellbauer, 2004. "Construction of CPIX Data for Forecasting and Modelling in South Africa," Economics Series Working Papers, University of Oxford, Department of Economics WPS/2004-09, University of Oxford, Department of Economics.
  2. Janine Aron & John Muellbauer, 2008. "Multi-sector inflation forecasting - quarterly models for South Africa," CSAE Working Paper Series, Centre for the Study of African Economies, University of Oxford 2008-27, Centre for the Study of African Economies, University of Oxford.

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