Mohammed Chahad
- 31 July 2024
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 5, 2024Details
- Abstract
- This article provides a technical evaluation of the performance of ECB/Eurosystem staff inflation projections since 2000. It complements the existing literature by examining the influence of HICP components as well as conditioning variables on the properties of HICP inflation projections, also taking into account potential time variation in forecast performance. The article shows how, from the low projection errors over the period leading up to the pandemic, Eurosystem/ECB staff forecast accuracy deteriorated in the face of atypical post-pandemic shocks before improving again since late 2022. However, it finds that the accuracy of Eurosystem/ECB staff projections of headline HICP inflation is broadly comparable to real-time market-based and private professional forecasts even after including the post-pandemic period of high inflation. The HICP forecast accuracy is comparable across main HICP components, including HICP excluding energy and food (HICPX), although HICPX inflation projections tend to show smaller errors than headline inflation projections. The article finds that ECB/Eurosystem staff inflation projections are unbiased overall but exhibit specific periods over the last 25 years in which this unbiasedness broke down. It also points to some rigidities in ECB/Eurosystem staff inflation projections, in particular for HICPX, which might explain part of this occasional bias. Finally, the article underscores the contribution of not only oil price assumptions but also other conditioning assumptions to the rigidities, occasional bias and reduced accuracy of ECB/Eurosystem staff projections of HICP inflation.
- JEL Code
- C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
- 21 March 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 2, 2024Details
- Abstract
- This box looks at errors in Eurosystem and ECB staff inflation projections over the post-pandemic period, updating and extending earlier analysis published in 2022 and 2023. Projection errors have come down considerably since the end of 2022 and now stand close to pre-pandemic levels. The low predictability of energy commodity prices (which surprised markets on the downside in 2023) explains a significant share of the recent errors in HICP inflation projections. The remaining errors are likely to stem from non-standard transmission of the exceptional shocks to commodity prices and global supply chains – which, together with demand shocks, explain a large share of the post-pandemic dynamics of HICP inflation excluding food and energy (HICPX), including in 2023. Eurosystem and ECB staff continue to refine their forecasting toolkits, providing additional analysis that informs projections in times of high uncertainty.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
- 16 February 2023
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 1, 2023Details
- Abstract
- This box updates the analysis published in April 2022 that reviewed the Eurosystem and ECB staff inflation projections published since the start of the coronavirus (COVID-19) pandemic. The accuracy of short-term inflation projections made by Eurosystem and ECB staff deteriorated after Russia invaded Ukraine in February 2022. However, projection accuracy improved in the final quarter of 2022. Errors related to conditioning assumptions for energy commodity prices and the pass-through of those prices to consumer prices (complicated by the uncertain impact of fiscal policy measures) continue to account for a significant albeit declining share of the total staff inflation projection errors. The remaining errors are likely to relate to the impact of global supply chain bottlenecks and reopening effects following the pandemic. In addition, the exceptional size of commodity price shocks may have led to a much faster pass-through, while the high inflationary environment may have enabled easier repricing and required faster resetting of prices than had been observed in the past. In comparative terms, other international institutions and private forecasters have under-predicted short-term euro area inflation to a similar extent. Eurosystem and ECB staff are continuing to re-evaluate their models to further improve the accuracy of their projection techniques and to provide additional analyses that can inform projections in times of high uncertainty.
- JEL Code
- J2 : Labor and Demographic Economics→Demand and Supply of Labor
- 28 April 2022
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 3, 2022Details
- Abstract
- This box reviews the large errors made throughout 2021 and the first quarter of 2022 in Eurosystem and ECB staff inflation projections. Errors in conditioning assumptions, notably due to unexpected energy price increases, are estimated to explain around three-quarters of these errors. Such errors are inherent to the nature of Eurosystem and ECB staff projections, which are conditioned on a set of assumptions, mainly stemming from market-based information including on energy prices. Supply bottlenecks being more persistent than expected, the recovery in economic activity being swifter than predicted, and the transmission of the energy price shock possibly being stronger than usual also played a role, and these factors likely explain a large portion of the errors in projecting HICP inflation excluding energy and food. A comparison with peer institutions shows that large inflation errors were widespread, not only across forecasters but also across economies. This emphasises the predominant role of global factors in a context of steep commodity price increases, especially for energy. While Eurosystem and ECB staff take all available information into account and continuously refine the models used in their projections, inflation developments are likely to remain challenging to forecast in the near term due to the volatile price movements in energy commodities, the uncertainty caused by the war in Ukraine and reopening effects following the removal of pandemic-related restrictions. In this context, complementing the Eurosystem and ECB staff baseline projections with scenario and sensitivity analyses help provide a richer representation of the inflation outlook.
- JEL Code
- C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies