Inflation model

The forecasting model to predict the inflation of the Harmonised Index of Consumer Prices (HICP) for the Netherlands provides point forecasts and prediction intervals for both the components of the HICP and the aggregated HICP-index itself.

The model is a small-scale linear time series model allowing for long-run equilibrium relationships between HICP components and other variables, notably the hourly wage rate and import prices. The model for the Netherlands is used to generate the Dutch inflation projections for the Eurosystem’s Narrow Inflation Projection Exercise (NIPE). The recursive forecast errors for several forecast horizons outperform a naive forecast and optimal AR models. Moreover, the same result holds for the Dutch NIPE projections, which have been provided quarterly since 1999. The aggregation method to predict total HICP inflation generally outperforms the direct method, except for long horizons.