Forecasting euro area inflation: Does aggregating forecasts by harmonized index of consumer prices component improve forecast accuracy?

Forecasting euro area inflation: Does aggregating forecasts by harmonized index of consumer prices component improve forecast accuracy?

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Article ID: iaor20053155
Country: Netherlands
Volume: 21
Issue: 1
Start Page Number: 119
End Page Number: 136
Publication Date: Jan 2005
Journal: International Journal of Forecasting
Authors:
Keywords: growth
Abstract:

Monitoring and forecasting price developments in the euro area is essential in light of the two-pillar framework of the ECB's monetary policy strategy. This study analyses whether the accuracy of forecasts of aggregate euro area inflation can be improved by aggregating forecasts of subindices of the Harmonized Index of Consumer Prices (HICP) as opposed to forecasting the aggregate HICP directly. The analysis includes univariate and multivariate linear time series models and distinguishes between different forecast horizons, HICP components and inflation measures. Various model selection procedures are employed to select models for the aggregate and the disaggregate components. The results indicate that aggregating forecasts by component does not necessarily help forecast year-on-year inflation 12 months ahead.

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