Inflation forecasts and core inflation measures: Where is the information on future inflation?

Abstract

• We compare the inflation forecast errors from the Greenbook, SPF and core inflation measures to a random walk model. • Forecasts from a random walk model are poor. • Greenbook forecasts no longer consistently maintain their information advantage. • The weighted median and trimmed mean do provide valuable information about the tendency of prices in the medium run. • The weighted median and trimmed mean provide information similar to the information in the Greenbook forecasts. This paper uses the forecast from a random walk model of inflation as a benchmark to test and compare the forecast performance of several alternatives of future inflation, including the Greenbook forecast by the Fed staff, the Survey of Professional Forecasters median forecast, CPI inflation minus food and energy, CPI weighted median inflation, and CPI trimmed mean inflation. The Greenbook forecast was found in previous literature to be a better forecast than other private sector forecasts. Our results indicate that both the Greenbook and the Survey of Professional Forecasters median forecasts of inflation and core inflation measures may contain better information than forecasts from a random walk model. The Greenbook's superiority appears to have declined against other forecasts and core inflation measures.