Expanding RBI's toolkit

Machine learning can improve inflation forecasting

The importance of accurate inflation forecasting for monetary policy cannot be overstated and central banks across the world have made big errors in recent years. Besides central banks, inflation forecasts also hold importance for households and firms, which negotiate wage-price contracts. In this context, economists at the Reserve Bank of India (RBI) recently came up with a research paper, comparing the accuracy of machine learning (ML) vis-à-vis traditional econometric models in forecasting inflation in the country. Using quarterly data from the second quarter of 1996 to the first quarter of 2022, the study notes that ML techniques outperform econometric models