Abstract
This paper looks at what variables are useful for forecasting inflation starting in 1990. I show that the output gap, a measure of real economic conditions, does seem to provide useful information for forecasting inflation. This is good news for the Reserve Bank, since the primary way that the Reserve Bank tries to affect future inflation is through real economic conditions. In addition, short-term interest rates and import price inflation also seem to provide useful information. The most accurate of these forecasts suggests a root mean square forecast error of 1–2 per cent for 1-year ahead inflation, which is within the Reserve Bank's current target range.
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