Forecasts and sunspots: looking back for a better future

To head off inflation before it gets started, central banks must use forecasts to determine monetary policy actions. But doing so introduces the possibility that inflation will increase just because the public expects it to. This Economic Commentary explains how random events (sunspots) can affect economic systems and create price volatility. The authors suggest that sunspots can be avoided with an approach that responds predominantly to past, rather than predicted, inflation.