Diagnostic tracking and model specification in combined forecasts of U.K. inflation

Combinations of several forecasts are now quite commonly used as inputs into business planning models. For example, capital budgeting generally involves a synthesis of several sources of economic forecasts. In such cases, where uncertainty and risk are also being explicitly considered, the statistical specification of the combined forecasts becomes particularly important. An investigation of the monthly forecasts of annual inflation from nine leading U.K. economic models was undertaken to examine the circumstances under which well-specified and efficient combined forecasts could be produced. This has helped to refine the general guidelines for the practical use of combinations in planning models.