Working Paper

The role of commodity prices in forecasting U.S. core inflation

Abstract: This note documents a curious finding about the substantial forecast ability of a simple aggregator of three commodity futures prices for U.S. core inflation. The proposed aggregator reduces the out-of-sample root mean squared error for 12-month-ahead inflation forecasts of the benchmark AR(1) model by 28 percent (20 percent) for the PCE (CPI) measure of core inflation. To avoid obfuscation of the sources of forecast ability, the model is intentionally kept simple, although extensions for improving and increasing the robustness of the forecast procedure are also discussed.

Keywords: core inflation; commodity futures; convenience yields; forecasting;

JEL Classification: C53; E37; G12;

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2016-02-01

Number: 2016-5

Pages: 10 pages