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How useful are leading indicators of inflation?

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  • C. Alan Garner

Abstract

Many economists expect inflation to rise in 1995. These expectations are based on various approaches to forecasting inflation. One approach is based on the standard economic theory that inflation rises when slack is eliminated from the economy and production exceeds capacity constraints. According to this view, measures of economic slack such as unemployment and capacity utilization provide useful information about the inflation outlook. But the relationship between slack and inflation is complicated and subject to variable lags.> Uncomfortable with this complex relationship, some analysts rely on alternative approaches to forecasting inflation. One approach is based on \\"leading indicators\\" of inflation. The leading indicators typically incorporate information on selected prices to augment or replace information on economic slack. The prices selected are usually key commodity prices that fluctuate more or less continuously in response to changing economic conditions. Prominent leading indicators of inflation include the price of gold, broader indexes of commodity prices, and composite indicators that combine several economic series believed to predict the inflation rate.> Garner examines five widely watched leading indicators and concludes that the composite indicators have given the most useful early warning signals of inflation turning points, but none of the indicators has recently been successful in predicting inflation magnitudes.

Suggested Citation

  • C. Alan Garner, 1995. "How useful are leading indicators of inflation?," Economic Review, Federal Reserve Bank of Kansas City, vol. 80(Q II), pages 5-18.
  • Handle: RePEc:fip:fedker:y:1995:i:qii:p:5-18:n:v.80no.2
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    4. Howard L. Roth, 1986. "Leading indicators of inflation," Economic Review, Federal Reserve Bank of Kansas City, vol. 71(Nov), pages 3-20.
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    Cited by:

    1. Lecarpentier-Moyal, Sylvie & Payelle, Nathalie, 2001. "Règle monétaire et cible de prévisions d’inflation," L'Actualité Economique, Société Canadienne de Science Economique, vol. 77(4), pages 531-568, décembre.
    2. Mai, Nhat Chi, 2013. "Determinants of the gold price in Vietnam," OSF Preprints pv8dz, Center for Open Science.
    3. Zivile Zekaite & Gabe de Bondt & Elke Hahn, 2017. "Alice: A New Inflation Monitoring Tool," EcoMod2017 10414, EcoMod.
    4. , Le Thi Son & Chi, Trinh Thuy & Anh, Nguyen Thi Nguyet, 2013. "Determinants of the gold price in Vietnam," OSF Preprints 85dqp, Center for Open Science.
    5. Bampinas, Georgios & Panagiotidis, Theodore, 2015. "Are gold and silver a hedge against inflation? A two century perspective," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 267-276.
    6. Gibson, Heather D. & Lazaretou, Sophia, 2001. "Leading inflation indicators for Greece," Economic Modelling, Elsevier, vol. 18(3), pages 325-348, August.
    7. Ciner, Cetin, 2011. "Commodity prices and inflation: Testing in the frequency domain," Research in International Business and Finance, Elsevier, vol. 25(3), pages 229-237, September.
    8. Aye, Goodness C. & Chang, Tsangyao & Gupta, Rangan, 2016. "Is gold an inflation-hedge? Evidence from an interrupted Markov-switching cointegration model," Resources Policy, Elsevier, vol. 48(C), pages 77-84.
    9. Zhiyong Tu & Min Song & Liang Zhang, 2013. "Emerging Impact of Chinese Commodity Futures Market on Domestic and Global Economy," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 21(6), pages 79-99, November.
    10. Zhu, Yanhui & Fan, Jingwen & Tucker, Jon, 2018. "The impact of monetary policy on gold price dynamics," Research in International Business and Finance, Elsevier, vol. 44(C), pages 319-331.
    11. Niek Nahuis, 2003. "An alternative demand indicator: the 'non-accelerating inflation rate of capacity utilization'," Applied Economics, Taylor & Francis Journals, vol. 35(11), pages 1339-1344.
    12. Granger, Clive W. J. & Jeon, Yongil, 2003. "Comparing forecasts of inflation using time distance," International Journal of Forecasting, Elsevier, vol. 19(3), pages 339-349.
    13. Todd E. Clark, 1995. "Do producer prices lead consumer prices?," Economic Review, Federal Reserve Bank of Kansas City, vol. 80(Q III), pages 25-39.
    14. de Bondt, Gabe J. & Hahn, Elke & Zekaite, Zivile, 2021. "ALICE: Composite leading indicators for euro area inflation cycles," International Journal of Forecasting, Elsevier, vol. 37(2), pages 687-707.
    15. Frederick T. Furlong & Robert Ingenito, 1996. "Commodity prices and inflation," Economic Review, Federal Reserve Bank of San Francisco, pages 27-47.
    16. Blose, Laurence E., 2010. "Gold prices, cost of carry, and expected inflation," Journal of Economics and Business, Elsevier, vol. 62(1), pages 35-47, January.
    17. Nguyen Thi Thanh Binh, 2023. "How to Hedge against Inflation Risk in Vietnam," Economies, MDPI, vol. 11(3), pages 1-12, March.
    18. Greg Tkacz, 2007. "Gold Prices and Inflation," Staff Working Papers 07-35, Bank of Canada.
    19. Saira Tufail & Sadia Batool, 2013. "An Analysis of the Relationship between Inflation and Gold Prices: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 1-35, July-Dec.

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    Keywords

    Economic indicators; Inflation (Finance);

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