New Inflation Index Predicts Future Prices with 60% Accuracy
Sticky price products, which change prices less often, give better clues about future inflation than products with flexible prices. A new measure shows that when prices change less than once a month, they are at least 60% forward-looking. This holds true in different sticky price models. In Hungary, a sticky price inflation index predicts inflation well 1-2 years ahead, better than other indicators like core inflation. This means the sticky price inflation index can help central banks target inflation effectively.