Chapter 1. Forecasting Inflation

This chapter discusses recent developments in inflation forecasting. We perform a horse-race among a large set of traditional and recently developed forecasting methods, and discuss a number of principles that emerge from this exercise. We find that judgmental survey forecasts outperform model-based ones, often by a wide margin. A very simple forecast that is just a glide path between the survey assessment of inflation in the current-quarter and the long-run survey forecast value turns out to be competitive with the actual survey forecast and thereby does about as well or better than model-based forecasts. We explore the strengths and weaknesses of some specific prediction methods, including forecasts based on the Phillips curve and based on dynamic stochastic general equilibrium models, in greater detail. We also consider measures of inflation expectations taken from financial markets and the tradeoff between forecasting aggregates and disaggregates.