Wednesday, November 15, 2017

New CPI data and forecast horizons

New CPI data is out, and here is the "headline" CPI model last updated a couple months ago:

I did change the error bar on the derivative data to show the 1-sigma errors instead of the median error in the last update. The level forecast still shows the 90% confidence for the parameter estimates. 

Now why wasn't I invited to this? One of the talks was on forecasting horizons:
How far can we forecast? Statistical tests of the predictive content
Presenter: Malte Knueppel(Bundesbank)
Coauthor: Jörg Breitung
A version of the talk appears here [pdf]. One of the measures they look at is year-over-year CPI, which according to their research seems to have a forecast horizon of 3 quarters — relative to a stationary ergodic process. The dynamic equilibrium model is approaching 4 quarters:

The thing is, however, the way the authors define whether the data is uninformative is relative to a "naïve forecast" that's constant. The dynamic equilibrium forecast does have a few shocks — one centered at 1977.7 associated with the demographic transition of women entering the workforce, and one centered at 2015.1 I've tentatively associated with baby boomers leaving the workforce [0] after the Great Recession (the one visible above) [1]. But for the period from the mid-90s after the 70s shock ends until the start of the Great Recession would in fact be this "naïve forecast":

The post-recession period does involve a non-trivial (i.e. not constant) forecast, so it could be "informative" in the sense of the authors above. We will see if it continues to be accurate beyond their forecast horizon. 



[0] Part of the reason for this shock to posited is its existence in other time series.

[1] In the model, there is a third significant negative shock centered at 1960.8 associated with a general slowdown in the prime age civilian labor force participation rate. I have no firm evidence of what caused this, but I'd speculate it could be about women leaving the workforce in the immediate post-war period (the 1950s-60s "nuclear family" presented in propaganda advertising) and/or the big increase in graduate school attendance.

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