VAR models of inflation

Can movements in some macroeconomic variables give information about future changes in inflation?

Here we illustrate the use of Vector Autoregressive (VAR) models as a way of tackling this question. Monthly and quarterly models are estimated, and we show how a small list of inflation indicator variables for each can be selected on statistical grounds. Forecasts for RPIX inflation from the monthly model show Inflation rising in 1993 before declining at the end of the year. The quarterly model is used to forecast both 1993 and 1994, and this shows inflation increasing in the second half of 1994 after falling over 1993 and the first half of 1994.

VAR models of inflation