Modelling and Forecasting Inflation in Tanzania

Modelling and forecasting inflation remains a vital concern in most of developing country economies. Moreover, better understanding of country¿s inflation situation and future inflation can facilitate the policy makers to adopt appropriate policy measures to curb the problem. The study supplements the financial programming framework of the Bank of Tanzania by ascertaining the model that incorporates some key behavioural properties that are necessary in forecasting inflation. The study employs the Box-Jenkins (1976) methodology that involves stages of identification, estimation, diagnostic checking, and forecasting of a uni-variate time series. The study recommends the government through the Bank of Tanzania to adopt the flexible form of inflation targeting so as improve the design and performance of monetary policy towards attainment of price stability. Results also indicate that inflation is expected to rise in the next six months; hence there is a need for government to react immediately to these inflationary pressures through appropriate fiscal and monetary policies.