An evaluation of alternative methods of forecasting Australian inflation

Abstract

The purpose of this paper is to evaluate the forecast of Australian inflation based on four alternative procedures: a univariate time series model, an interest rate model, an error correction model and a public survey of inflation forecasts. We derive estimates of expected and unexpected inflation from each of the methods and compare the out-sample forecasting results. Based on a range of evaluation criteria, the time series model dominates the other models, with the interest rare model, the error correction model and the survey forecasts following in that order