Nowcasting U.S. Headline and Core Inflation

57 Pages Posted: 25 May 2014 Last revised: 10 Jan 2015

See all articles by Edward S. Knotek

Edward S. Knotek

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Saeed Zaman

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: May 23, 2014

Abstract

Forecasting future inflation and nowcasting contemporaneous inflation are difficult. We propose a new and parsimonious model for nowcasting headline and core inflation in the U.S. price index for personal consumption expenditures (PCE) and the consumer price index (CPI). The model relies on relatively few variables and is tested using real-time data. The model’s nowcasting accuracy improves as information accumulates over the course of a month or quarter, and it easily outperforms a variety of statistical benchmarks. In head-to-head comparisons, the model’s nowcasts of CPI inflation outperform those from the Blue Chip consensus, with especially significant outperformance as the quarter goes on. The model’s nowcasts for CPI and PCE inflation also significantly outperform those from the Survey of Professional Forecasters, with similar nowcasting accuracy for core inflation measures. Across all four inflation measures, the model’s nowcasting accuracy is generally comparable to that of the Federal Reserve’s Greenbook.

Keywords: inflation, nowcasting, forecasting, real-time data, professional forcasters, Greenbook

JEL Classification: E03, E37, C53

Suggested Citation

Knotek, Edward S. and Zaman, Saeed, Nowcasting U.S. Headline and Core Inflation (May 23, 2014). Available at SSRN: https://ssrn.com/abstract=2441236 or http://dx.doi.org/10.2139/ssrn.2441236

Edward S. Knotek (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Saeed Zaman

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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