News can improve food prices forecast: RBI study

NEW DELHI: News can help improve accuracy of forecasting food inflation in the country. An RBI paper says combining high frequency information on prices, with market intelligence on high-impact food items, helps 'nowcast' (short-term forecast) food inflation and generate near-term forecasts.

It said three key vegetables - tomatoes, onions and potatoes (TOP), with a combined weight of 2.2% in the consumer price index (CPI) basket in India - contribute heavily to volatility in both food inflation and headline inflation, impacting the performance of nowcasts. Using big data techniques and information on these three items reported in nine leading English news dailies published during 2011-2021, the RBI occasional paper, authored by Bhanu Pratap, Abhishek Ranjan, Vimal Kishore and Binod B Bhoi, has constructed commodity sentiment indices to capture price dynamics of TOP commodities.

"Empirical findings suggest an inverse relationship between the constructed news sentiment indices of TOP and changes in TOP prices. Exploiting this feature in a formal forecasting framework to predict inflation in vegetables and food prices, it is found that adding news-based information in the form of net sentiments improves forecasting accuracy," the paper said.

Extreme weather events driven by climate change also made the task of forecasting inflation quite challenging in the last few years, such that augmenting models with information on extreme weather events can improve forecasting performance, according to the paper.

It said that newspaper articles about crop damages, extreme weather events, pest attacks, trade restrictions, transporters' strikes or other adverse events - which can have a significant impact on future prices - can provide useful additional information. Further, the sentiment associated with each article and the coverage frequency of these events can provide helpful information regarding such price shocks. "This information can be extracted and analysed using text mining," according to the paper.

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