University of Oslo, Department of Economics
Ragnar Nymoen, 31 January 2006
Norwegian inflation forecasts, January 2006
This is the fourth of a sequence of forecasts of the Norwegian rate of inflation using a small scale
econometric model to produce automatized inflation forecasts, AIRs. The approach taken, and
model used, is the same as has been useful in analyzing the recent forecasts failure affecting
Norges Bank's inflation forecasts, see Nymoen (2005).
The forecasted variable is the four quarter rate of change in the Norwegian consumer price index,
adjusted for taxes and energy prices (CPI-ATE). The forecast horizon is 16 quarters, from
2006(1) to 2009(4).
The January 2006 inflation forecast is shown in the fan-chart below. The point forecasts are
shown as a black line, and the 90% prediction intervals are indicated by the symmetric fans. The
inflation target of 2.5% is also indicated, as well as the recent inflation history, from 2001(1) to
2005(4) (red line). In 2006 inflation is projected to increase moderately from its present level.
The forecasted rate of inflation is then increasing more vigorously in the period 2007-2009,
making a level of inflation in the range of 2.0%-2.5% a more likely event.
31. january 2006, AIR inflation forecast
0.05
0.04
CPI-ATE rate of change
0.03
0.02
0.01
0.00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
The forecasting mechanism itself, it 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. The theory behind the
inflation forecasting equation, and the econometric specification of the whole system is explained
in Nymoen (2005).
University of Oslo, Department of Economics
Ragnar Nymoen, 31 January 2006
The figure below shows the inflation forecast together with forecasts of the main explanatory
variables in the “inflation equation”. The main explanation of the upswing in inflation is the
reduced rate of unemployment forecasted by the model. The last panel of the graph shows that
the interest rate differential (difference between domestic and foreign interest rate) is increasing
in the forecast period.
Inflation (annual CPI-ATE rate)
Foreign inflation
0.050
0.04
0.025
0.02
0.000
0.00
2005
2006
2007
2008
2009
2010
Rate of unemployment (log scale)
2005
0.10
2006
2007
2008
2009
2010
2007
2008
2009
2010
2009
2010
Productivity growth
0.05
0.0
0.00
-0.05
-0.5
2005
2006
2007
2008
2009
2010
2005
Real exchange rate
2006
Interest rate differential (money market rate)
0.050
-0.1
0.025
0.000
-0.2
2005
-0.025
2006
2007
2008
2009
2010
2005
Graph created on 31 January 2006
2006
2007
2008