Forecasting CPI inflation under economic policy and geopolitical uncertainties

Forecasting consumer price index (CPI) inflation is of paramount importance for both academics and policymakers at central banks. This study introduces the filtered ensemble wavelet neural network (FEWNet) to forecast CPI inflation, tested in BRIC countries. FEWNet decomposes inflation data into high- and low-frequency components using wavelet transforms, and incorporates additional economic factors, such as economic policy uncertainty and geopolitical risk, to enhance forecast accuracy. These wavelet-transformed series and filtered exogenous variables are input into downstream autoregressive neural networks, producing the final ensemble forecast. Theoretically, we demonstrate that FEWNet reduces empirical risk compared to fully connected autoregressive neural networks. Empirically, FEWNet outperforms other forecasting methods and effectively estimates prediction uncertainty, due to its ability to capture non-linearities and long-range dependencies through its adaptable architecture. Consequently, FEWNet emerges as a valuable tool for central banks to manage inflation and enhance monetary policy decisions.

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Publication Details

Journal
International Journal of Forecasting
Published
2024-09-20
DOI
https://doi.org/10.1016/j.ijforecast.2024.08.005
Citations
16
Primary Topic
Market Dynamics and Volatility
Type
article
Field-Weighted Citation Impact
18.07

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article

Forecasting CPI inflation under economic policy and geopolitical uncertainties

Tanujit Chakraborty, Sunny Kumar Singh, Shovon Sengupta
16 citations
International Journal of Forecasting
Market Dynamics and Volatility
18.07
article

Forecasting CPI inflation under economic policy and geopolitical uncertainties

Tanujit Chakraborty, Sunny Kumar Singh, Shovon Sengupta
article en
16 citations

Abstract

Forecasting consumer price index (CPI) inflation is of paramount importance for both academics and policymakers at central banks. This study introduces the filtered ensemble wavelet neural network (FEWNet) to forecast CPI inflation, tested in BRIC countries. FEWNet decomposes inflation data into high- and low-frequency components using wavelet transforms, and incorporates additional economic factors, such as economic policy uncertainty and geopolitical risk, to enhance forecast accuracy. These wavelet-transformed series and filtered exogenous variables are input into downstream autoregressive neural networks, producing the final ensemble forecast. Theoretically, we demonstrate that FEWNet reduces empirical risk compared to fully connected autoregressive neural networks. Empirically, FEWNet outperforms other forecasting methods and effectively estimates prediction uncertainty, due to its ability to capture non-linearities and long-range dependencies through its adaptable architecture. Consequently, FEWNet emerges as a valuable tool for central banks to manage inflation and enhance monetary policy decisions.

International Journal of ForecastingVol. 41(3)
Fidelity Investments (United States) (US), Sorbonne Université (FR), Birla Institute of Technology and Science - Hyderabad Campus (IN), Sorbonne University Abu Dhabi (AE)
Sorbonne Université
Openalex Percentile: Top 1%
Market Dynamics and Volatility
18.07
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