The Role of Commodity Prices in Forecasting U.S. Core Inflation
10 Pages Posted: 15 Feb 2016 Last revised: 30 Aug 2017
Date Written: 2016-02-01
This note documents a curious finding about the substantial forecast ability of a simple aggregator of three commodity futures prices for U.S. core inflation. The proposed aggregator reduces the out-of-sample root mean squared error for 12-month-ahead inflation forecasts of the benchmark AR(1) model by 28 percent (20 percent) for the PCE (CPI) measure of core inflation. To avoid obfuscation of the sources of forecast ability, the model is intentionally kept simple, although extensions for improving and increasing the robustness of the forecast procedure are also discussed.
Keywords: core inflation, commodity futures, convenience yields, forecasting
JEL Classification: C53, E37, G12
Suggested Citation: Suggested Citation