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Can urban coffee consumption help predict US inflation?

Salisu, Afees A; Swaray, Raymond; Adediran, Idris A

Authors

Afees A Salisu

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Dr Raymond Swaray R.Swaray@hull.ac.uk
Senior Lecturer (Associate Professor) in Economics

Idris A Adediran



Abstract

Motivated by the importance of coffee to Americans and the significance of the coffee subsector to the US economy, we pursue three notable innovations. First, we augment the traditional Phillips curve model with the coffee price as a predictor, and show that the resulting model outperforms the traditional variant in both in-sample and out-of-sample predictability of US inflation. Second, we demonstrate the need to account for the inherent statistical features of predictors such as persistence, endogeneity, and conditional heteroskedasticity effects when dealing with US inflation. Consequently, we offer robust illustrations to show that the choice of estimator matters for improved US inflation forecasts. Third, the proposed augmented Phillips curve also outperforms time series models such as autoregressive integrated moving average and the fractionally integrated version for both in-sample and out-of-sample forecasts. Our results show that augmenting the traditional Phillips curve with the urban coffee price will produce better forecast results for US inflation only when the statistical effects are captured in the estimation process. Our results are robust to alternative measures of inflation, different data frequencies, higher order moments, multiple data samples and multiple forecast horizons.

Citation

Salisu, A. A., Swaray, R., & Adediran, I. A. (2019). Can urban coffee consumption help predict US inflation?. Journal of forecasting, 38(7), 649-668. https://doi.org/10.1002/for.2589

Journal Article Type Article
Acceptance Date Mar 8, 2019
Online Publication Date Apr 25, 2019
Publication Date 2019-11
Deposit Date Apr 18, 2019
Publicly Available Date Oct 27, 2022
Journal Journal of Forecasting
Print ISSN 0277-6693
Electronic ISSN 1099-131X
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 38
Issue 7
Pages 649-668
DOI https://doi.org/10.1002/for.2589
Keywords USA; Phillips curve; Coffee price; Inflation forecasts; Forecast evaluation
Public URL https://hull-repository.worktribe.com/output/1378827
Publisher URL https://onlinelibrary.wiley.com/doi/abs/10.1002/for.2589
Additional Information Received: 2018-04-23; Accepted: 2019-03-08; Published: 2019-04-25

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