How Technology Can Help in Inflation Forecasting

The integration of AI in economic forecasting, specifically inflation prediction, is a burgeoning field that leverages advancements in ML and natural language processing

- Soumya Kanti Ghosh & Pulak Ghosh

"Central banks must feel like they have stepped through a mirror, and who can blame them? They used to struggle to bring inflation down or keep it under control; now they toil to push it up. They used to fear wage increases; now they urge them on. They used to dread fiscal expansion; now they sometimes invoke it." — Claudio Borio, 2017, former head, Monetary and Economic Department, Bank for International Settlements

Fast forward to 2022, when this cycle was reversed, and it was completely unanticipated, with the world engulfed with a vicious inflation cycle. However, such developments clearly reflected the significant scholastic challenges in monetary policymaking post the global financial crisis and in the aftermath of the pandemic. Interestingly, such challenges now also confront monetary policymaking in India, as we are recently witnessing. In essence, globalization has acted as a powerful tool in contributing to extended periods of low and high inflation. Additionally, the entry of low-paid workers in the workforce at home and globally, as emerging markets have opened up, has further complicated monetary policymaking.

Against this background, it is imperative that the economic research methodology at central banks (the Reserve Bank of India included) of forecasting macro variables like inflation keep pace with technological advancements. Remarkably, the new RBI governor has already emphasized the importance of such tools.