The contribution of consumer confidence indexes in forecasting the effects of oil prices on private consumption

Abstract

In this article the contribution of consumer confidence indexes in forecasting consumption expenditures is analysed. In the first part equations explaining the consumer confidence index (CCI) in four major European countries (Germany, Italy, United Kingdom and France) are estimated by a few exogenous variables (oil prices, interest rates, exchange rates and the U.S. stock market index) are estimated. In the next section these equations are used to forecast the CCI for 1986. We then present equations explaining private consumption by using the CCI. In the final section a comparison is made between forecasts of consumption expenditures for 1986 obtained by using the observed and the predicted CCI. The forecasts obtained by using the predicted CCI tend to overestimate the positive impact of the recent drop in oil prices on consumption expenditures. The conclusions support the view that consumer surveys do contain original information since their use reduces, in general, the forecasting errors.