Inflation Modelling
Document ID: 2009-1483
Published on: 30th April 2009
Author: Steffen Sorensen
2008 was an extraordinary year in financial markets. As the year progressed it became increasingly clear that many financial institutions were in serious trouble. The key question was no longer about how the macro economy can be insulated from events in financial markets, but was how to minimise the inescapable impact of such events upon the macro economy. This led to a significant slowing of global output and subsequently lower pressure on inflation.
The downward pressure on consumer and retail prices was exacerbated by the collapse in commodity prices in the final quarter of 2008 and deflation has now become a real possibility. We can never guard ourselves completely against such unexpected events and need to allow for uncertainty in our projected inflation distributions even if central banks credibly steer policy rates to keep inflation on target.
