The ability to accurately predict inflation is crucial for economic stability and informed decision-making. Historical data from 1999 to 2015 reveals that inflation nowcasts generated by the Bank Of Cleveland’s model have demonstrated remarkable precision. This model consistently outperforms various alternative statistical models, particularly when forecasting inflation within a month or quarter.
However, the true significance of the Bank of Cleveland model’s performance becomes evident when compared to leading benchmarks: nowcasts derived from surveys of seasoned professional forecasters. Notably, the model’s nowcasts for Consumer Price Index (CPI) inflation tend to exhibit greater accuracy than the consensus (average) nowcasts provided by the Blue Chip Economic Indicators survey. Furthermore, in predicting both CPI and Personal Consumption Expenditures (PCE) inflation, the Bank of Cleveland’s model surpasses the median nowcasts from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters (SPF).
These findings are particularly striking considering that professional forecasters leverage a wide array of models and expert judgment to account for unique factors influencing short-term inflation trends. The collective wisdom, or the law of large numbers, is generally expected to enhance forecast accuracy. Despite this, the Bank of Cleveland’s model maintains a competitive edge. When focusing on core inflation, the model’s accuracy aligns with the SPF forecasts. However, a key advantage emerges: the Bank of Cleveland’s model provides nowcasts daily, offering a significantly higher frequency compared to the quarterly releases of the SPF.
An additional valuable comparison is against publicly available nowcasts from the Greenbook. The Greenbook, a comprehensive analysis of economic conditions prepared by the Federal Reserve Board of Governors staff for Federal Open Market Committee meetings, is known for its high accuracy. Historically, the Bank of Cleveland’s model nowcasts have closely mirrored those of the Greenbook. The critical distinction lies in accessibility: the Greenbook is released to the public with a five-year delay, while the Bank of Cleveland’s model delivers comparable insights in real-time, offering an unparalleled advantage for timely economic analysis.
