University of Oslo, Department of Economics
Ragnar Nymoen, 4 February 2008
Norwegian inflation forecasts, January 2008
This is the eight of a sequence of forecasts of the Norwegian rate of inflation, using a small scale
econometric model to produce automatized inflation forecasts, AIFs. The approach taken, and
model used, is the same as has been useful in analyzing the failure affecting Norges Bank's
inflation earlier forecasts, see Nymoen (2005).
The forecasted variable is the 4 quarter rate of change in the Norwegian consumer price index,
adjusted for taxes and energy prices (CPI-ATE). The forecast based on the end of January 2008
version of the AIF model is shown in the fan-chart below. The point forecasts are shown as a
thick blue line, and the 90% prediction intervals are indicated by the symmetric fans. Based on
the AIF forecasting model, future inflation rates inside this narrower interval are more likely
events than inflations rates outside the narrower forecast band. The recent inflation history, from
2004(1) to 2007(4) is shown by the red line.
0.040
AIF forecast 4 February 2008. Rate of inflation (CPI−AET)
0.035
0.030
0.025
0.020
0.015
0.010
0.005
2004
2005
2006
2007
2008
2009
2010
2011
Inflation is projected to increase in the first three quarters of 2008. For most of the forecast
period the point forecast is between 2% and 2.5%. Late in the period the forecasted rate of
inflation is decreasing. The estimated uncertainty allows for inflation both higher and lower than
the 2.5% inflation target. Towards the end of the forecast horizon, inflation below 2.5% is
regarded by the model as more likely than inflation above 2.5% though.
The forecasting mechanism used (the AIR model) consists of an equation for the rate of inflation
(CPI-ATE), and 8 equations which are needed to forecast the following variables: the (logarithm
of the) rate of unemployment, productivity growth, the nominal and the real exchange rates,
foreign inflation (in foreign currency), domestic and foreign interest rates and oil prices.
University of Oslo, Department of Economics
Ragnar Nymoen, 4 February 2008
The figure on this page shows the nominal 3 month interest rate (money market rate) which is
forecasted together with inflation and the other variables in the AIF forecasting model. Over the
2008-2010 period as a whole, there is no significant rise in the forecasted interest rate, although
the point forecast shows a continuation of the increases from 2006 and 2007, but in smaller steps.
AIF forecasts 4 February 2008. The 3−month nominal interest rate
0.10
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
2004
2005
2006
2007
2008
2009
2010
2011