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Update: CEOs not so great at forecasting inflation, say BOJ researchers

Business leaders are unsurprisingly imperfect at forecasting inflation, according to Bank of Jamaica researchers, who want inflation expectation surveys augmented with market data to improve predictability.

A new BOJ working paper proposes to use both the survey and data method to improve forecasting by a statistically significant amount.

“Inflation surveys in emerging market economies should be revised and tested against market data to improve their usefulness for policymakers and forecasters,” said the paper authored by Uluc Aysun and Cardel Wright. Aysun is an associate professor in the Department of Economics at the University of Central Florida, while Wright is senior economic researcher in the Research and Economic Programming Division of the Bank of Jamaica.

BOJ working papers generally reflect the view of the writers and not necessarily the policy stance of the central bank.

“Specifically, we find that forecasts of inflation obtained by using market data are much more accurate than those obtained by survey data,” said the paper titled Forecasting Inflation and Inflation Expectations in Small Open Economies: A Comparison of Market and Survey based Approaches for Jamaica.

The study expects that, over time, with the addition of increased availability of large data sets that central banks would likely include increased market data.

The BOJ currently canvasses the “perceptions” of present and future business conditions from CEOs, managing directors, and financial controllers in its Survey of Businesses’ Inflation Expectations that’s produced eight times per year. These responses assist the central bank in charting future policy positions, according to the preface to the survey.

The inflation researchers made forecasts using up to 10 variables, namely: the monthly CPI, Jamaican dollar to US dollar exchange rate, fuel prices, industrial electricity fuel sales, Jamaican Stock Exchange index, commercial bank loans, M1 money supply, three-month Treasury bill rates, Bank of Jamaica policy rate, and a rainfall variable.

Since the onset of the pandemic, respondents’ expectations at times jumped wildly from actual outcomes. For example, inflation hit at post-pandemic peak of 11.8 per cent in April 2022, but survey respondents had predicted an inflation rate of 6.1 per cent. The predictions improved somewhat with the cooling down of the 12-month inflation rate towards 6.3 per cent at November 2023, latest data suggests.

The BOJ started publishing quarterly inflation surveys in 2013. They are conducted on the central bank’s behalf by the Statistical Institute of Jamaica.

The most recent survey for the period ending October had 244 respondents. The executives are asked about the level of inflation they expect over the next three months, and over the next year, amid other questions.

The exercise, while academic, holds implications for the BOJ’s ability to get ahead of rising inflation. A better methodology, it is felt, could lead to better policy outcomes in relation to how the central bank deploys tools such as interest rates to keep inflation within target range.

Central banks globally in the pursuit of price stability have rallied behind inflation targeting as a cornerstone of monetary policy since the early 1990s, the researchers said. Despite its overall success, the weakness of this strategy lies in the accuracy of inflation forecasts, and the methodologies utilised, the working paper added.

“Forecasts made by using backward and forward looking Phillips curves, medium scale dynamic stochastic general equilibrium models, univariate time series models, and inflation expectations inferred from surveys have not revealed a clear winner,” the researchers said.


CORRECTION: This story has been updated to correct the names of the authors of the working paper and the frequency of the inflation survey report.

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