Unemployment data improves real-time inflation forecasting accuracy significantly.
The article explores different ways to predict inflation rates in real-time. By analyzing long-term inflation expectations and economic indicators, researchers found that removing short-term fluctuations in inflation data improves forecasting accuracy. Including a measure of unemployment in the forecasting models further enhances performance. However, adding slack to models using headline inflation or core inflation data leads to worse predictions. Models using a specific methodology consistently outperform traditional forecasting models.