Forecasts of inflation with price expectations

Abstract

This paper embeds survey price expectations of manufacturing into a mark-up model of price determination. The model, which is employed to forecast (changes in) growth in consumer and producer prices one quarter ahead, is estimated for seven EEC countries. The predictive performance, in terms of the mean forecast error, of the model is compared with an ARIMA forecast of inflation. The results suggest that the predictive performance of the price-expectational-augmented price model is superior to the ARIMA model.