Modeling Inflation in Australia

This article develops an empirically constant, data-coherent, error-correction model for inflation in Australia. The level of consumer prices is a markup over domestic and import costs, with adjustments for dynamics and relative aggregate demand. We address issues of cointegration, general to specific modeling, dynamic specification, model evaluation and testing, parameter constancy, forecasting, and exogeneity. We also test this model against existing models of Australian prices: This model encompasses (but is not encompassed by) the existing models.