Bananas and petrol: further evidence on the forecasting accuracy of the ABS ‘headline’ and ‘underlying’ rates of inflation
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In the light of the still topical nature of 'bananas and petrol' being
blamed for driving much of the inflationary pressures in Australia in
recent times, the 'headline' and 'underlying' rates of inflation are
scrutinised in terms of forecasting accuracy. A general structural
time-series modelling strategy is applied to estimate models for
alternative types of Consumer Price Index (CPI) measures. From this,
out-of-sample forecasts are generated from the various models. The
underlying forecasts are subsequently adjusted to facilitate comparison.
The Ashley, Granger and Schmalensee (1980) test is then performed to
determine whether there is a statistically significant difference between
the root mean square errors of the models. The results lend weight to the
recent findings of Song (2005) that forecasting models using underlying
rates are not systematically inferior to those based on the headline rate.
In fact, strong evidence is found that underlying measures produce
superior forecasts. Copyright © 2009 John Wiley & Sons, Ltd.
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