How We Missed the Inflation Surge: An Anatomy of Post-2020 Inflation Forecast Errors

Download or read book How We Missed the Inflation Surge: An Anatomy of Post-2020 Inflation Forecast Errors written by Mr. Christoffer Koch and published by International Monetary Fund. This book was released on 2023-05-12 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the inflation forecast errors over the period 2021Q1-2022Q3 using forecasts of core and headline inflation from the International Monetary Fund World Economic Outlook for a large group of advanced and emerging market economies. The findings reveal evidence of forecast bias that worsened initially then subsided towards the end of the sample. There is also evidence of forecast oversmoothing indicating rigidity in forecast revision in the face of incoming information. Focusing on core inflation forecast errors in 2021, four factors provide a potential ex post explanation: a stronger-than-anticipated demand recovery; demand-induced pressures on supply chains; the demand shift from services to goods at the onset of the pandemic; and labor market tightness. Ex ante, we find that the size of the COVID-19 fiscal stimulus packages announced by different governments in 2020 correlates positively with core inflation forecast errors in advanced economies. This result hints at potential forecast inefficiency, but we caution that it hinges on the outcomes of a few, albeit large, economies.