Forecasting inflation in Montenegro using univariate time series models

The analysis of price trends and their prognosis is one of the key tasks of the economic authorities in each country. Due to the nature of the Montenegrin economy as small and open economy with euro as currency, forecasting inflation is very specific which is more difficult due to low quality of the data. This paper analyzes the utility and applicability of univariate time series models for forecasting price index in Montenegro. Data analysis of key macroeconomic movements in previous decades indicates the presence of many possible determinants that could influence forecasting result. This paper concludes that the forecasting models (ARIMA) based only on its own previous values cannot adequately cover the key factors that determine the price level in the future, probably because of the existence of numerous external factors that influence the price movement in Montenegro.