Advanced Search
MyIDEAS: Login

Forecasting inflation with consumer survey data – application of multi-group confirmatory factor analysis to elimination of the general sentiment factor

Contents:

Author Info

Registered author(s):

    Abstract

    This paper (1) examines the properties of survey based households’ inflation expectations and investigates their forecasting performance. With application of the individual data from the State of the Households’ Survey (50 quarters between 1997Q4 and 2010Q1) it was shown that inflation expectations were affected by the consumer sentiment. Multi-Group Confirmatory Factor Analysis (MGCFA) was employed to verify whether a set of proxies provides a reliable basis for measurement of two latent phenomena – consumer sentiment and inflation expectations. Following the steps proposed by Davidov (2008) and Steenkamp and Baumgartner (1998), it appeared that it was possible to specify and estimate a MGCFA model with partial measurement invariance. Thus it was possible to eliminate the influence of consumer sentiment on inflation expectations and at the same time to obtain individually corrected answers concerning the inflation expectations. Additionally, it was shown that the linear relation between consumer sentiment and inflation expectations was stable over time. As a by-product of analysis, it was possible to show that respondents during the financial crisis were much less consistent in their answers to the questions of the consumer questionnaire. In the next step of the analysis, data on inflation expectations were applied to modelling and forecasting inflation. It was shown that with respect to standard ARIMA processes, inclusion of the information on the inflation expectations significantly improved the in-sample and out-of-sample forecasting performance of the time-series models. Especially out-of-sample performance was significantly better as the average absolute error in forecasts of headline and core inflation was reduced by half. It was also shown that models with inflation expectations based on the CFA method (after elimination of the consumer sentiment factor) provided better in-sample forecasts of inflation. Nevertheless, it was not confirmed for the out-of-sample forecasts. (1) Project financed by the National Bank of Poland. Polish title of the project: "Prognozowanie inflacji na podstawie danych koniunktury gospodarstw domowych. Zastosowanie konfirmacyjnej analizy czynnikowej dla wielu grup do oczyszczenia prognoz inflacji z czynnika ogólnego nastroju gospodarczego."

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nbp.pl/publikacje/materialy_i_studia/100_en.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 100.

    as in new window
    Length: 67
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:nbp:nbpmis:100

    Contact details of provider:
    Postal: 00-919 Warszawa ul. Świętokrzyska 11/21
    Phone: (0-22) 653 10 00
    Fax: (0-22) 620 85 18
    Web page: http://www.nbp.pl/Homen.aspx?f=en/publikacje/materialy_i_studia/informacja_en.html
    More information through EDIRC

    Related research

    Keywords: Inflation expectations; Inflation forecasts; Confirmatory Factor Analysis;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Steenkamp, Jan-Benedict E M & Baumgartner, Hans, 1998. " Assessing Measurement Invariance in Cross-National Consumer Research," Journal of Consumer Research, University of Chicago Press, vol. 25(1), pages 78-90, June.
    2. Bharat Trehan, 2009. "Survey measures of expected inflation and the inflation process," Working Paper Series 2009-10, Federal Reserve Bank of San Francisco.
    3. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521634809, October.
    4. Rolf Scheufele, 2011. "Are Qualitative Inflation Expectations Useful to Predict Inflation?," OECD Journal: Journal of Business Cycle Measurement and Analysis, OECD Publishing,CIRET, vol. 2011(1), pages 29-53.
    5. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, vol. 84(5), pages 1397-1408, December.
    6. R. Golinelli & R. Orsi, 2001. "Hungary and Poland," Working Papers 424, Dipartimento Scienze Economiche, Universita' di Bologna.
    7. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
    8. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
    9. Henry, Olan T. & Shields, Kalvinder, 2004. "Is there a unit root in inflation?," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 481-500, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbp:nbpmis:100. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ewa Szymecka).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.