Forecasting Spanish inflation using information from different sectors and geographical areas

This paper evaluates different strategies to forecast Spanish inflation using information of price series for 57 products and 18 regions in Spain. We consider vector equilibrium correction (VeqC) models that include cointegration relationships between Spanish prices and prices in the regions of Valencia, Andalusia, Madrid, Catalonia and the Basque Country. This approach is consistent with economic intuition and is shown to be of tangible importance after suitable econometric evaluation. It is found that inflation forecasts can always be improved by aggregating projections from differente sectors and geographical areas. Moreover, cointegration relationships between regional and national prices must be considered in order to obtain a significantly better inflation forecast.