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01.15.20

Cleveland Fed researcher explores the potential for market-based inflation measures to improve inflation forecasting

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Market-based inflation measures can be useful sources of information about the likely path of future headline inflation, according to a new report from the Cleveland Fed’s Center for Inflation Research.

In “A Forecasting Assessment of Market-Based PCE Inflation,” Cleveland Fed researcher Mark Bognanni compares the pseudo-real time forecasting performance of a suite of models for forecasting headline PCE inflation over the short and medium run. He finds that a simple model using only market-based core PCE inflation showed the best forecasting performance at all horizons.

“When given the most recent observations from which to generate predictions, the market-based core PCE inflation model predicts that headline PCE inflation will average between 1.8 percent and 1.9 percent both in the near term (the next 1 to 6 months) and in the medium term (the next 1 to 3 years),” Bognanni says.

Read more: A Forecasting Assessment of Market-Based PCE Inflation

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