The Federal Reserve Bank of Cleveland’s model for forecasting near-term inflation readings has been more accurate at predicting price pressures during the pandemic than the various alternatives, according to new research from the bank.
(Bloomberg) — The Federal Reserve Bank of Cleveland’s model for forecasting near-term inflation readings has been more accurate at predicting price pressures during the pandemic than the various alternatives, according to new research from the bank.
The Cleveland Fed’s “nowcast” estimates of inflation measures are updated each business day and include projections for headline and core measures for the consumer price index and the price index for personal consumption expenditures. The researchers analyzed the accuracy of the model from the second quarter of 1999 to the fourth quarter of 2022 and for a shorter period since the start of the Covid-19 pandemic.
“While past performance does not guarantee future results, we find that our inflation nowcasting model has performed relatively well during both sample periods,” the researchers Edward S. Knotek II and Saeed Zaman wrote in commentary published Monday.
The model on Monday saw core CPI rising by 5.5% in February from a year earlier and headline CPI rising by 6.2% from a year earlier. That is slightly above the 5.4% increase and 6% increase expected respectively by the economic forecasters surveyed by Bloomberg. The Labor Department will release February CPI on March 14.
The regional Fed bank’s predictions for headline inflation have been more accurate historically when compared to alternative models, the researchers said. The accuracy for core inflation readings, which strip out volatile food and fuel costs, have been similar to that of other models.
“These results are noteworthy because when making forecasts, professional forecasters can and do use a range of models and expert judgment to capture the special factors that affect near-term inflation trends,” Knotek and Zaman wrote.
Fed officials are rapidly raising interest rates as they work to tame high inflation. Policymakers lifted their benchmark rate to a target range of 4.5% to 4.75% in February from near zero levels a year ago. Fed officials will release updated projections for inflation, the economy and interest rates when they meet again on March 21-22.
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