Has Inflation Become Harder to Forecast

Abstract

We examine whether the U.S. rate of price inflation has become harder to forecast and, to the extent that it has, what changes in the inflation process have made it so. The main finding is that the univariate inflation process is well described by an unobserved component trend-cycle model with stochastic volatility or, equivalently, an integrated moving average process with time-varying parameters. This model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well. Key words: Phillips curve, trend-cycle model, moving average, great moderation JEL codes: C53, E37 *We thank Jonas Fisher for bringing several of the issues discussed in this paper to our attention in a 1999 conversation, Luca Benati for (more recent) helpful suggestions, and Matthew Shapiro, Robert Gordon, and two anonymous referees for helpful comments on an earlier draft. Replications files for the results in this paper can be downloaded from

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