Inflation Forecasting, Relative Price Variability and Skewness

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Published in Applied Economics Letters, 2010, vol. 17, 593-596.

Abstract: We aim to forecast U.K. inflation out-of-sample. Our study uses disaggregated quarterly UK consumption data from 1964:1 to 2004:3. A major finding of our analysis is that inflation forecasts of long time horizons of 1.5-2 years are significantly improved if a measure of symmetry of the price distribution is incorporated into the forecast equation. In contrast, the inclusion of price variability leads to deterioration in inflation forecasting performance.

Keywords: inflation forecasting, relative price variability, relative price skewness