Forecasting Inflation: Phillips Curve Effects on Services Price Measures

38 Pages Posted: 19 Oct 2015

See all articles by Ellis W. Tallman

Ellis W. Tallman

Federal Reserve Bank of Cleveland

Saeed Zaman

Federal Reserve Bank of Cleveland

Date Written: 2015-10-14

Abstract

We estimate an empirical model of inflation that exploits a Phillips curve relationship between a measure of unemployment and a subaggregate measure of inflation (services). We generate an aggregate inflation forecast from forecasts of the goods subcomponent separate from the services subcomponent, and compare the aggregated forecast to the leading time-series univariate and standard Phillips curve forecasting models. Our results indicate notable improvements in forecasting accuracy statistics for models that exploit relationships between services inflation and the unemployment rate. In addition, models of services inflation using the short-term unemployment rate (less than 27 weeks) as the real economic indicator display additional modest forecast accuracy improvements.

Keywords: Inflation forecasting, Phillips curve, disaggregated inflation forecasting models, trend-cycle model

JEL Classification: C22, C53, E31, E37

Suggested Citation

Tallman, Ellis W. and Zaman, Saeed, Forecasting Inflation: Phillips Curve Effects on Services Price Measures (2015-10-14). FRB of Cleveland Working Paper No. 1519, Available at SSRN: https://ssrn.com/abstract=2675378 or http://dx.doi.org/10.2139/ssrn.2675378

Ellis W. Tallman (Contact Author)

Federal Reserve Bank of Cleveland ( email )

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

Saeed Zaman

Federal Reserve Bank of Cleveland ( email )

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

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