Forecasting U.S. inflation

Worrying, yet somewhat unreliable first forecasts

From Tuomas Malinen on Geopolitics and the Economy.

There’s one thing I really have not put to good use in my/our analyses before. My academic career, which essentially started in 2003, when I started to work on my Master’s Thesis, was about analyzing long time series of macroeconomic variables (macroeconomic: the national, regional, and global level). I concentrated on the (long) time-series of gross domestic product, income inequality, credit, debt, and crises in a so-called panel data framework.

My PhD Thesis dealt with the relationship between income inequality and economic development, but my academic magnum opus was To default or not? The aftermath of sovereign defaults and IMF programs in economic crises published with Olli Ropponen. We studied how sovereign defaults and austerity measures affect the economic growth of countries during and after economic crises by using a large dataset that included 45 countries observed over nearly 60 years (1951–2010). It was an excruciating piece of research, which took over five years to complete. We found that A) defaults on domestically held government debt tend to be more destructive than defaults on foreign-held government debt in crises, and B) the IMF's (International Monetary Fund) austerity programs offer a more lenient growth outcome (but only when they are followed). I hope that our research will be of interest to concerned parties when the next wave of global sovereign defaults begins, which is not likely to be far off.

In any case, I’ve been staring at, analyzing, and forecasting time series for over 20 years. Just a few weeks ago, I thought that this should be put to good use in the forecasting activity of GnS Economics. As a result of this, I will also present more statistical forecasts here. Note that Mate Suto has a background in both physics and economics and he specializes in statistical analysis.

Let’s start this by providing forecasts for the development of the Consumer Price Index (CPI) of the U.S. for the next 12 months. The (preliminary) results add to the analysis presented in the Weekly Forecasts, and they are not what the Federal Reserve would like to see.