Forecasting Inflation: Phillips Curve Effects on Services Price Measures

RePEc Short ID: pta94
ORCID iD: 0000-0001-8387-2768

Tallman, Ellis W.; Zaman, Saeed

doi:10.26509/frbc-wp-201519

Working Paper

Forecasting Inflation: Phillips Curve Effects on Services Price Measures

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;

https://doi.org/10.26509/frbc-wp-201519