CPI Inflation Research Articles

Money/Asset Ratio as a Predictor of Inflation

This paper modifies the quantity theory of money to forecast inflation, relating the latter to scale variables such as monetary aggregate M2 and government bonds that measure the money demand for asset transactions. The out-of-sample forecast results show that at least since the early 1990s, the money/asset model that uses the money supply/government debt ratio as a predictor has been significantly improved upon univariate and multivariate models, such as Phillips curve and term spread models, for forecasting U.S. inflation over one- to three-year horizons. In using real-time vintage data, I find that, since 2000Q1, the forecasts derived from the money/asset model have slightly improved upon those from the Greenbook in forecasting quarter-over-quarter CPI inflation at short horizons, from two- to four-quarter. These results imply that the Federal Reserve can use the money supply/government debt ratio to forecast and control the inflation rates, coordinating monetary policy with fiscal policy. Moreover, the money supply/government debt ratio can partly explain the U.S. inflation dynamics from the early 1960s until COVID-19.

Empirical Analysis of Vat Revenues on the Economic Growth of Albania

Objective: The presence of VAT revenues and its management to improve economic growth is crucial, very complex, and challenging. The aim is to see the influence of VAT revenue on economic growth, especially those that come from customs. Theoretical Framework: In this topic, the researchers are focused on the direct relationship between total VAT revenues and economic growth. According to the statistics of our economy, we choose to investigate the VAT revenues from customs looking to estimate their specific weight on the economic growth. Methods: In the econometric model, we introduce the VAT revenues from customs as the variable taken with precaution regarding value gain. Other variables based on the perspective of it, like CPI (inflation) and rate of exchange euro/all, are included in the model. Aggregate data presented by the official institutions are used to determine the influence of VAT on the economic growth measured by the GVA variable. This choice eliminates the duplication of the economic growth value by taxes and subsidies on products. Results and Discussion: The results underline the influence of VAT and CPI on economic growth (p< 0.05). Therefore, the reduction of the inflation rate and the application of an optimal rate of VAT regarding the parameters of the economic situation in the country remains an emergency in recent days.

Weighted Median Inflation Around the World: A Measure of Core Inflation

The standard measure of core or underlying inflation is the inflation rate excluding food and energy prices. This paper constructs an alternative measure, the weighted median inflation rate, for 38 advanced and emerging economies using subclass level disaggregation of the CPI over 1990–2021, and compares the properties of this measure to those of standard core. For quarterly data, we find that the weighted median is less volatile than standard core, more closely related to economic slack, and more closely related to headline inflation over the next year. The weighted median also has a drawback: in most countries, it has a lower average level than headline inflation. We therefore also consider a measure of core inflation that eliminates this bias, which is based on the percentile of sectoral inflation rates that matches the sample average of headline CPI inflation.

Forecasting food price inflation during global crises

AbstractIn this paper, we consider the forecasting of domestic food price inflation (DFPI) using global indicators, with emphasis on episodes of macroeconomic turbulence, namely, the Global Financial Crisis (GFC) and the COVID‐19 pandemic and its subsequent repercussions. Our monthly dataset covers about two decades for more than a hundred economies. We employ dynamic model averaging (DMA) to tackle both model uncertainty and parameter instability and produce pseudo out‐of‐sample forecasts. Thus, we are able to focus on the forecasting ability of the global predictors of DFPI before and during the global crises. We find evidence that the DMA specification tends to outperform statistical models frequently used in the literature such as random walks, autoregressive models, and time‐varying parameter models, especially during global crises. We also identify the most successful predictors during the crises using their posterior probabilities of inclusion. By comparing the distributions of such probabilities, we find that the international food price inflation is the most useful predictor of DFPI for numerous countries during both crises. Other indicators such as domestic CPI inflation as well as the international inflation of agricultural commodities, fertilizers, and other food categories improved their forecasting ability, particularly during the COVID‐19 period.

Forecasting Prices for Components of the Medical Cost Index

Abstract A new method is proposed to project future costs for medical components of a life care plan. The technique estimates the historical link between inflation in medical components of the CPI and overall inflation. This linkage for each component can then be applied to a CPI forecast to project inflation in that underlying component. Estimates are made for 17 separate medical cost components of the CPI. Root mean square errors show that our proposed method for forecasting component inflation performs better than more commonly used forecast methods. Our method incorporates the best parts of both historical and forecasting methods; it utilizes information from the financial markets and professional surveys to form the baseline inflation forecast, then adjusts the value using historical data, thereby leveraging both expert opinion and empirical observation.

Assessing the impact of Rwanda trade integration on inclusive growth

This paper analysed the impact of trade integration on inclusive growth in Rwanda using time series data from 1992 up to 2022. This study used the Fully Modified Least Squares approach to internalise the problem of endogeneity due to omitted variables and feedback effect. This study revealed evidence of deep connection between the five independent variables (trade integration, Import duties, foreign direct investment, Exchange rate, CPI inflation) and the inclusive growth of the Rwandan economy. Besides, these results indicated that an increase in trade integration is expected to increase inclusive growth in the economy of Rwanda.

The Impact of Inflation Rate and Interest Rate on Islamic and Conventional Banking in Afghanistan

Since the first bank was established in 1933, Afghanistan's banking sector has seen a number of variations but hasn't been able to grow to its full potential because of the civil war. The implementation of dual banks in Afghanistan is investigated in this study in relation to the effects of inflation and interest rates. This research took data from World Bank Data (WBD) over a period of nineteen years. For the banking sector, inflation, which is the general rise in prices of goods and services over time, presents considerable difficulties. The objectives of this research are to analyze the effect of inflation and interest rates on conventional and Islamic banks in Afghanistan, identify potential differences between these two banking models, and provide insights for policymakers and practitioners. A mixed-methods approach is used in the research to analyze quantitative data and qualitatively examine the unique difficulties that banks in Afghanistan's economic atmosphere encounter. The findings contribute to the understanding of the relationship between interest rate, inflation rate, and the performance of both banking systems in Afghanistan. The paper concludes with recommendations for policymakers and banking institutions to enhance the stability and growth of the banking sector in Afghanistan. Interest is described as "a prefixed rate for use or borrowing of money" from an Islamic perspective. This "prefixed rate," known in Islamic economics as "riba," has been described as "something undesirable." Furthermore, by using the time series regression data technique on the annual data from 2003 to 2021, this research examines the effect of CPI inflation rate and interest rate of Banking in Afghanistan.

Dissecting the impact of imports from low-wage countries on inflation

Using micro data on import values and quantities by product and countries of origin, we quantify the effect of imports from low-wage countries (LWCs) on inflation in France from 1994 to 2014. Imports of varieties produced in LWCs affect the cost-of-living price index through pure-price and taste-shock variations (which, conditional on prices, drive expenditure shares). The pure-price effect includes both the contribution of imported inflation (given the share of imports in consumption) and the effect of imports of intermediate goods from LWCs on domestic prices. Taste shocks cannot be directly observed but are recovered from expenditure shares and relative prices, using estimated values for the elasticity of substitution. We derive an expression of inflation that allows us to disentangle the impact of imports of consumption goods from LWCs on cost-of-living versus CPI inflation — the latter abstracting for composition effects. Overall, we estimate that imports from LWCs lowered CPI inflation by 0.02 pp per year on average, and had a much larger effect on cost-of-living inflation (between 0.13 to 0.20 pp per year depending on how we measure unit values).

Expectations, structural breaks and the recent surge in inflation

I use a switching-point VAR to detect if the transmission of inflation expectations to CPI inflation has changed in the post-Covid period. I find evidence that, although inflation expectation shocks affected CPI inflation somewhat stronger after 2020, the differences to the previous regime are too small to be a driving force behind the recent incline in inflation.

What Drives Corporate Saving in India?

Corporates have traditionally been modelled for their investment rather than saving behaviour. However, in recent times the firm-level saving has displayed an unprecedented behaviour across developed and developing economies. Corporate saving behaviour in India has also witnessed fluctuations, and this study captures a mix of aggregate and firm-level variables that may explain this behaviour. This article has three objectives (a) to understand the firm and macroeconomic factors that drive firm-level saving; (b) to examine whether the firm saving is affected by savings in preceding years; (c) to identify whether this saving behaviour of firms is for precautionary motives or not. The data set used in this article includes panel data of 2,109 publicly listed, manufacturing and service sector firms for the financial years 2004–2018. The data analysis has been done using dynamic panel-data models employing system GMM estimation with multiple robustness checks. The study findings show that firm-level saving in India is mainly driven by lagged corporate saving, Tobin’s Q, GDP growth rate, CPI inflation, and financial depth, among other factors. Additionally, empirical evidence supports the presence of dynamic persistence effect and precautionary motives for savings by firms. JEL Codes: E21, G01, G32, C33

Demand for Money and Inflation in Ethiopia

One of the vital components of the macroeconomic model that helps policymaking is the demand for money function. Having reliable predictions on the money demand function helps in determining the optimum growth of money supply which is vital in controlling the inflation rate in the economy and also preventing monetary disturbances from affecting real output. In order to formulate and estimate the money demand function in Ethiopia, this study used quarterly data from 2000Q3 to 2021Q2 and employed the Ordinary Least Square method and Engle-Granger two-stage procedure for empirical analysis. The empirical result from the models indicates that, in the long run, all variables (real GDP, CPI inflation, real effective exchange rate, real interest rate and lagged real money balance) are significantly affecting the demand for money in Ethiopia. Whereas, the estimated coefficients of the short-run variable show that the real effective exchange rate, CPI inflation, and lagged real money balance are the main determinants of demand for money while the real GDP and real interest rate are insignificant. Another important finding is that absolute value of the coefficient of the error correction term implies that about 54.2% of the disequilibrium in real money demand is counter-balanced by short-run adjustment in each quarter. The study suggests that in conducting monetary policy, policymakers should consider not only the behavior of income and price but also the movement of exchange rates. The study also calls for appropriate formulation and estimation of the all-encompassing demand for money function that is capable of bringing stability to the growth of money coupled with sustainable economic growth.

The chronology of Brexit and UK monetary policy

The outcome of the Brexit referendum in June 2016 was largely unanticipated. Even after the “Leave” vote, surprises regarding the withdrawal process affected the UK economy. We draw on an official list of political events published by the House of Commons Library and daily data on asset prices and economic policy uncertainty to construct a novel instrument for Brexit surprises. Including a monthly aggregate of this instrument into a vector-autoregressive model of the UK economy, an adverse Brexit surprise lowers GDP growth while raising CPI inflation. We provide evidence that the Bank of England fended off a worse economic contraction.

How do real and monetary integrations affect inflation dynamics?

This paper examines the significance of real and monetary integrations for the inflationary dynamics of an emerging country, Turkey. The analysis accounts for 2-digit items of CPI inflation, which can be broadly categorized as tradable versus non-tradable and goods versus services. We find that a fall in the inflation gap between partner countries is mainly related to real integration whereas the co-movement of inflation is prominently driven by monetary policy co-movements. The product-type analysis shows that inflation gap in tradable items between trade partners shrinks and becomes more correlated with the (de)convergence and co-movement of real integration.

A broader perspective on the inflationary effects of energy price shocks

Consumers purchase energy in many forms. Sometimes energy goods are consumed directly, for instance, in the form of gasoline used to operate a vehicle, electricity to light a home, or natural gas to heat a home. At other times, the cost of energy is embodied in the prices of goods and services that consumers buy, say when purchasing an airline ticket or when buying online garden furniture made from plastic to be delivered by mail. Previous research has focused on quantifying the pass-through of the price of crude oil or the price of motor gasoline to U.S. inflation. Neither approach accounts for the fact that percent changes in refined product prices need not be proportionate to the percent change in the price of oil, that not all energy is derived from oil, and that the correlation of price shocks across energy markets is far from one. This paper develops a vector autoregressive model that quantifies the joint impact of shocks to several energy prices on headline and core CPI inflation. Our analysis confirms that focusing on gasoline price shocks alone will underestimate the inflationary pressures emanating from the energy sector, but not enough to overturn the conclusion that much of the observed increase in headline inflation in 2021 and 2022 reflected non-energy price shocks.

Reason for Opposite Movement of GDP Deflator Inflation with CPI Inflation in Korea

Korea's CPI inflation reached 6.3% in Jul. 2022, the fastest increase since Nov. 1998. However, the quarterly GDP deflator inflation for the third quarter of 2022 was only 0.2% over the same quarter of 2021. The differences between Korea's CPI and GDP deflator are the way of measuring price and the set of goods and services they cover. The goods and services in the investment, government expenditures, export, and import are not in the consumer's basket but in GDP. Moreover, imported goods and services contribute to the GDP negatively. If the import price increases when other things stand still, the GDP deflator decreases. In contrast, the cost of consumer baskets generally increases. Therefore, the import price changes only can induce the opposite moves of the CPI and the GDP deflator inflations.

COVID-19 inflation weights in the UK and Germany

The COVID-19 pandemic altered consumption patterns significantly in a short period of time. However, official inflation statistics take time to reflect changes in the weights of the CPI consumption basket. Using credit card data for the UK and Germany, we document how consumption patterns changed and quantify the resulting inflation bias. We find that consumers experienced a higher level of inflation at the beginning of the pandemic than what a fixed-weight inflation (or the official-weight) index suggests and lower inflation thereafter. We also show that weights can differ among age groups and in-person vs. online spenders. These differences affect the purchasing power of the population heterogeneously. We conclude that CPI inflation indexes based on frequently updated weights can provide useful inputs to assess changes in the cost of living, including across segments of the population. If shifts in consumption patterns prove persistent, these indexes can help determine the need to introduce new weights and inform monetary policy and the design of support policies for the more vulnerable.

Inflation inequality in Austria: A mid-term view on cost-of-living developments

I compute household-specific inflation rates for Austria for the period between 2016 and 2019. Data is provided by Statistics Austria’s Consumer Expenditure Survey for 2014/15 (“Konsumerhebung”) and contains household expenditures reaching the 3-digit COICOP level. I find a negative plutocratic bias, meaning that common types of measurement tend to understate CPI inflation. In the period covered, the distribution of inflation is characterized by large dispersion, meaning that the standard CPI inflation is not very representative for a large proportion of Austrian households. There is a clear negative relationship between income and inflation that is mainly driven by ownership status. Households living in rental accommodation are affected significantly more by inflation. I further find an urban-rural divide in the sense that households in larger cities are more likely to exhibit higher individual inflation rates than their counterparts in small municipalities. Considering household structures, single households exhibit significantly higher inflation. These effects remain significant even after controlling for ownership status. All in all, the results are strong arguments for paying greater attention to the issue of inflation inequality when it comes to wage setting, taxation or indexations, as there are potentially large distributional effects going unrecognized.

Вплив глобалізації на динаміку інфляції

Introduction. The article studies the impact of globalization on the dynamics of inflation due to increased integration between developed economies and emerging countries in the period 1990-2022, its causes and effects. Problem Statement. Based on the analysis of statistical data, it was established that global inflation in the world economy has a direct impact on domestic inflation in emerging countries, as well as a pronounced structural character in developed countries. This means that even minor disruptions in global trade channels can cause inflation. Purpose. Explaining the impact of globalization on the level of inflation in developed countries and commodity economies through the expansion of trade integration, the strengthening of the role of emerging markets, price competition and the increase in the volatility of interest rates. Methods. According to the results of a dispersion analysis, a hypothesis of the existence of a connection between the components of globalization channels and inflation indicators, which determine the volatility of prices for goods and services in the medium term was investigated . Results. The global components of each inflation indicator are analyzed for the full sample of advanced economies and emerging markets. CPI and producer price index are found to have a significant common global component, accounting for 40% of the difference in CPI inflation and 52% in producer price index inflation of the countries in the sample. However, the role of the common component is much smaller for core inflation and wage inflation. The first main component of inflation accounts for about 21-26% of the variation in inflation for different samples. Conclusions. The increase in the global component of inflation over the past two decades can be explained by major global crises arising from high volatility of commodity prices, greater sensitivity of countries to global shocks due to increased trade or financial integration, or closer direct links between economies. The effect of the transfer of global inflation on domestic prices requires that the central bank should conduct a tighter monetary policy towards achieving the price stability.

EU Accession and Macroeconomic Performance of the Transition Economies

It has been nearly two decades since the Central and Eastern European countries (CEECs) joined the European Union in 2004. These former centrally planned countries should have now firmly settled down as members of the vast single bloc of market economies. We study the macroeconomic performance of eleven CEECs following the EU accession. The eleven transition economies have reduced CPI inflation rates from 35.6% to 1.9% during the period. Real GDP growth rates have slowed down slightly from 2.92% to 2.77%, but showed absolutely best performance compared to the Western European countries, the UK and the US. Furthermore, CPI inflation rates, unemployment rates, and current account balances all show a very strong convergence among the sample countries. OLS regression indicates positive significant effect of budget surplus and nominal effective exchange rates whereas negative effect of government debt and real effective exchange rates on real GDP growth rates. This implies continued dominance of government and the importance of trade in the macroeconomic performance of the eleven transition countries. In the non-linear STR (smooth transition regression) analysis, we get significant regression results for Poland and Bulgaria. Other countries do not show proper STR results, possibly due to small number of observations.

Inflation Forecasting for Pakistan in a Data-rich Environment

This paper uses machine learning methods to forecast the year-on-year CPI inflation of Pakistan and compare their forecasting performance against the comprehensive traditional forecasting suite contained in Hanif and Malik (2015). It also augments the comprehensive forecasting suite with the dynamic factor model which is able to handle a large amount of information and put all of these models in competition against the latest machine learning models. A set of 117 predictors covering a period of July 1995 to June 2020 is used for this purpose. We set the naïve mean model as the benchmark and compare its forecasting performance against 14 traditional and 5 sophisticated machine learning models. We forecast the year-on-year CPI inflation over a 24 months horizon. Forecasting performance is measured using the RMSE. Our results show that the machine learning approaches perform better than the traditional econometric models at 18 forecast horizons.