Improving Inflation Forecasts Using Robust Measures

Randal Verbrugge and Saeed Zaman

No 22-23R, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Theory and extant empirical evidence suggest that the cross-sectional asymmetry across disaggregated price indexes might be useful in forecasting aggregate inflation. Trimmed-mean inflation estimators have been shown to be useful devices for forecasting headline PCE inflation. But is this because they signal the underlying trend or because they implicitly signal asymmetry in the underlying distribution? We address this question by augmenting a "hard" to beat benchmark headline PCE inflation forecasting model with robust trimmed-mean inflation measures and robust measures of the cross-sectional skewness, both computed using the 180+ components of the PCE price index. Our results indicate significant gains in the point and density accuracy of PCE inflation forecasts over medium- and longer-term horizons, up through and including the COVID-19 pandemic. Improvements in accuracy stem mainly from the trend information implicit in trimmed-mean estimators, but skewness information is also useful. An examination of goods and services PCE inflation provides similar inference.

Keywords: median PCE inflation; trimmed-mean PCE; disaggregate inflation; skewness; forecasting (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 (search for similar items in EconPapers)
Pages: 41
Date: 2022-08-03, Revised 2023-05-30
New Economics Papers: this item is included in nep-for and nep-mon
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Journal Article: Improving inflation forecasts using robust measures (2024)
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DOI: 10.26509/frbc-wp-202223r

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