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Nowcasting U.S. Headline and Core Inflation

Forecasting future inflation and nowcasting contemporaneous inflation are difficult. We propose a new and parsimonious model for nowcasting headline and core inflation in the U.S. price index for personal consumption expenditures (PCE) and the consumer price index (CPI). The model relies on relatively few variables and is tested using real-time data. The model’s nowcasting accuracy improves as information accumulates over the course of a month or quarter, and it easily outperforms a variety of statistical benchmarks. In head-to-head comparisons, the model’s nowcasts of CPI inflation outperform those from the Blue Chip consensus, with especially significant outperformance as the quarter goes on. The model’s nowcasts for CPI and PCE inflation also significantly outperform those from the Survey of Professional Forecasters, with similar nowcasting accuracy for core inflation measures. Across all four inflation measures, the model’s nowcasting accuracy is generally comparable to that of the Federal Reserve’s Greenbook.

Keywords: inflation, nowcasting, forecasting, real-time data, professional forecasters, Greenbook.

JEL classifications: E3, E37, C53.

Suggested citation: Knotek, Edward S. II, and Saeed Zaman, 2014. “Nowcasting U.S. Headline and Core Inflation,” Federal Reserve Bank of Cleveland, Working Paper no. 14-03.

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