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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. consumer price index (CPI) and price index for personal consumption expenditures (PCE) that relies on relatively few variables. The model’s nowcasting accuracy improves as information accumulates over a month or quarter, outperforming statistical benchmarks. In real-time comparisons, the model’s headline inflation nowcasts substantially outperform those from the Blue Chip consensus and the Survey of Professional Forecasters. Across all four inflation measures, the model’s nowcasting accuracy is comparable to the Federal Reserve Board’s Greenbook.

JEL Codes: E3, E37, C53.

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

Suggested citation: Knotek, Edward S. II, and Saeed Zaman, 2015. “Nowcasting U.S. Headline and Core Inflation,” Federal Reserve Bank of Cleveland, Working Paper no. 14-03R.

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