Forecasting of the Annual Inflation Rate in the Unstable Economic Conditions

Abstract

Inflation is a very important macroeconomic indicator, which measures the change in the general level of prices of goods and services. The monthly time series of the annual inflation rate is defined as the growth rate of the monthly time series of the consumer price index with respect to the corresponding month of the previous year. The annual inflation rate might not always be the appropriate measure of inflation, mainly due to the fact that it does not provide up-to-date information on the level of inflation. The harmonic analysis shows that the annual inflation rate deforms and delays the information with respect to the monthly inflation rate. This conclusion can be extremely important in the forecasting of the inflation rate, as well as in the process of economic decision making. The new method for the construction of the annual inflation rate forecasts is proposed. The advantage is that it is able to catch breaks and other instabilities in the future development of the time series.