Inflation Forecasting with Inflation Sentiment Indicators
In this paper we argue that future inflation in an economy depends on the way people perceive current inflation, their inflation sentiment.We construct some simple measures of inflation sentiment which capture whether price acceleration is shared by many components of the CPI basket. In a comparative analysis of the forecasting power of the different inflation indicators for the US and Germany, we demonstrate that our inflation sentiment indicators improve forecast accuracy in comparison to a standard Phillips curve approach. Because the forecast performance is particularly good for longer horizons, we also compare our indicators to traditional measures of core inflation.Here, the sentiment indicators outperform the weighted median and show a similar forecasting power as a trimmed mean. Thus, they offer a convincing alternative to traditional core inflation measures.
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- Rossi, Barbara & Giacomini, Raffaella, 2006.
"Detecting and Predicting Forecast Breakdowns,"
06-01, Duke University, Department of Economics.
- Brachinger, Hans Wolfgang, 2006. "Euro or “Teuro”?: The Euro-induced Perceived Inflation in Germany," DQE Working Papers 5, Department of Quantitative Economics, University of Freiburg/Fribourg Switzerland.
- Diebold, Francis X & Mariano, Roberto S, 2002.
"Comparing Predictive Accuracy,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 20(1), pages 134-44, January.
- Kai Carstensen, 2007. "Is core money growth a good and stable inflation predictor in the euro area?," Kiel Working Papers 1318, Kiel Institute for the World Economy.
- Robert Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
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