From the NY Fed:
Controlling inflation is at the core of monetary policymaking, and central bankers would like to have access to reliable inflation forecasts to assess their progress in achieving this goal. Producing accurate inflation forecasts, however, turns out not to be a trivial exercise. This posts reviews the key challenges in inflation forecasting and discusses some recent developments that attempt to deal with these challenges.
The approach of combining many inflation prediction specifications while allowing for inflation instability is most useful in predicting slowdowns in inflation over the twelve months following the estimate. Within this time frame, the model has an average 20 to 30 percent improvement in forecast precision over inflation trend predictions. Future inflation accelerations, however, aren’t well tracked by our model. This is consistent with the 2010 Jackson Hole paper by Mark Watson and James Stock, which suggests that slack variables, such as the unemployment rate, can only predict inflation when they are worsening relative to the preceding business cycle peak. Thus, only during economic slowdowns do activity measures seem to have predictive information for inflation.
What should be the core of monetary policymaking? Inflation is badly specified, difficult to forecast and subject to “destabilizing” supply shocks.
Much better to focus on maintaining Nominal Stability, perhaps through an NGDP Level Target