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A Framework for Forecasting the Components of the Consumer Price Index: application to South Africa Janine Aron, CSAE John N.J. Muellbauer, Nuffield College, University of Oxford Coen Pretorius, South African Reserve Bank, Pretoria, South Africa Download the Paper (PDF format) - May 20, 2004 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing. ABSTRACT: Inflation is a far from homogeneous phenomenon, but this fact is ignored in most work on consumer price inflation. Using a novel methodology grounded in theory, the ten sub-components of the consumer price index (excluding mortgage interest rates, or CPIX) forSouth Africa are modeled separately and forecast, four quarters ahead. The method combines equilibrium correction models in a rich multivariate form with the use of stochastic trends estimated by the Kalman filter to capture structural breaks and institutional change. This research is of considerable practical use for monetary policy, allowing sectoral sources of inflation to be identified. Aggregating the forecasts of the components with appropriate weights from the overall index, potentially indicates the gains to be made in forecasting the idiosyncratic sectoral behaviour of prices, over forecasting the overall consumer price index. SUGGESTED CITATION: Janine Aron, John N.J. Muellbauer, and Coen Pretorius, "A Framework for Forecasting the Components of the Consumer Price Index: application to South Africa" (May 20, 2004). The Centre for the Study of African Economies Working Paper Series. Working Paper 207. http://www.bepress.com/csae/paper207