Forecasting Inflation

Stock, James H.; Watson, Mark W.

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Forecasting Inflation

NBER Working Paper No. w7023

46 Pages Posted: 13 Apr 1999 Last revised: 11 Sep 2022

See all articles by James H. Stock

James H. Stock

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Mark W. Watson

Princeton University - Princeton School of Public and International Affairs; National Bureau of Economic Research (NBER)

Date Written: March 1999

Abstract

This paper investigates forecasts of U.S. inflation at the 12-month horizon. The starting point is the conventional unemployment rate Phillips curve, which is examined in a simulated out of sample forecasting framework. Inflation forecasts produced by the Phillips curve generally have been more accurate than forecasts based on other macroeconomic variables, including interest rates, money and commodity prices. These forecasts can however be improved upon using a generalized Phillips curve based on measures of real aggregate activity other than unemployment, especially a new index of aggregate activity based on 61 real economic indicators.

Suggested Citation: Suggested Citation

Stock, James H. and Watson, Mark W., Forecasting Inflation (March 1999). NBER Working Paper No. w7023, Available at SSRN: https://ssrn.com/abstract=155850