Price changes at different time horizons
Economic Commentaries, News In recent years of high inflation, more attention than before has been paid to price developments over periods shorter than 12 months. In a new Economic Commentary by Oskar Tysklind and Jesper Johansson, the authors show that when inflation is at normal levels, the information content of the more high-frequency measures is limited. Quite simply, they are too volatile. In contrast, during periods of large movements in inflation, measures at shorter horizons such as three and six months can provide useful information about where we are heading.
The Riksbank’s inflation target is expressed in terms of the annual percentage change in the CPIF. As monetary policy works with a certain time lag, the Riksbank needs to make forecasts of future inflation. In times of high and volatile inflation, more high-frequency measures of inflation can provide information on where inflation is heading in the future. Greater focus has therefore also been placed on these measures during the rise in inflation in recent years. In this commentary, the authors examine the usefulness of these measures by evaluating their forecasting performance both under normal conditions and in times of high inflation.
The results show that in normal times, high-frequency measures of price changes are too volatile to provide a good indication of future events. However, when there are large movements in inflation, their information value increases. Now that inflation is returning to more normal levels, the most high-frequency measures are likely to be too volatile again to be useful.
Authors: Oskar Tysklind and Jesper Johansson of the Monetary Policy Department.
ECONOMIC COMMENTARIES
Economic Commentaries are brief analyses of issues with relevance for the Riksbank. They may be written by individual members of the Executive Board or by employees at the Riksbank. Employees’ commentaries are approved by their head of department, while Executive Board members are themselves responsible for the content of the commentaries they write.