Thursday, 9 February 2012

The Predictability of Inflation Forecasts

Central Bank of Iceland published the first issue of its Monetary Bulletin (2012) yesterday along with keeping the interest rates unchanged at 4.75%.

Some time ago, I pointed out (in Icelandic) how the inflation forecast of the CBI always ends right next to 2.5% in about 8 quarters. The reason why is that they are using a Quarterly Macroeconomic Model that they borrowed from the Bank of England - they say so themselves - and the "steady state" of the QMM is inflation equal to the inflation target of the CBI. And you guessed it, it's 2.5%

The newest forecast for inflation isn't surprising a bit! One can always be rather certain that no matter the state of the economy, domestic or world wide, the Central Bank of Iceland will always "forecast" inflation to be at or right next to the 2.5% inflation target in about two years time.

Talking about predictability!

The forecasts of inflation according to the Central Bank of Iceland. Inflation will, no matter the state of the economy or future prospects, always end up right next to the inflation target of 2.5%. "1Q10" represents the inflation forecast as it was presented in Monetary Bulletin for 1st quarter 2010 (issued in January 2010). Click to enlarge.


  1. Thanks for your pertinent, succinct posts.
    Have you tried doing a similar analysis of the inflation forecasts of the major banks ? I've had that in mind as a desirable project for some time but have never got around to carrying it out [shame :-( ].
    You seem more geared up to actually doing the analysis ...

  2. Thanks for the comment Big D. I haven't done the similar analysis on the big central banks' forecasts but I'd not be surprised that the bottom line is rather similar, at least in the case of BoE since CBI borrows their model from them.

    If you do it before I do, please let me know!!