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Forecasting Core Inflation in Canada: Should We Forecast the Aggregate or the Components?

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Author Info
Frédérick Demers
Annie De Champlain

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Abstract

The authors investigate the behaviour of core inflation in Canada to analyze three key issues: (i) homogeneity in the response of various price indexes to demand or real exchange rate shocks relative to the response of aggregate core inflation; (ii) whether using disaggregate data helps to improve the forecast of core inflation; and (iii) whether using monthly data helps to improve quarterly forecasts. The authors show that the response of inflation to output-gap or real exchange rate shocks varies considerably across the components, although the average response remains low; they also show that the average response has decreased over time. To forecast monthly inflation, the use of disaggregate data is a significant improvement over the use of aggregate data. However, the improvements in forecasts of quarterly rates of inflation are only minor. Overall, it remains difficult to properly model and forecast monthly core inflation in Canada.

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File URL: http://www.bankofcanada.ca/en/res/wp/2005/wp05-44.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 05-44.

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Length: 65 pages
Date of creation: 2005
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Handle: RePEc:bca:bocawp:05-44

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Related research
Keywords: Econometric and statistical methods; Inflation and prices;

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Find related papers by JEL classification:
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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    Other versions:
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