Growth cycle signals as inflation indicators for major industrial nations

Abstract

One of the issues of concern to forecasters is whether leading indicators of the real economy, which are now issued in many countries, have a bearing on the future of inflation. Doubtless a direct approach, which would involve the development of leading indicators specifically related to inflation, would be preferable. However, we are aware of only one such index currently available, the leading index of inflation compiled for the United States by the Center for International Business Cycle Research. Hence in this paper we explore whether leading and coincident indexes measuring real growth are useful for forecasting inflation in the U.S., the United Kingdom, West Germany and Japan. Section 2 shows how growth cycles and inflation cycles are related in these countries, using results from a recent study by Moore and Philip Klein for the World Bank. Section 3 explains the development of signals of turning points in inflation rate cycles using the growth rates in the leading and coincident indexes. It shows the leads and lags of the signal system at inflation cycle turns, and measures the magnitude of changes in the inflation rate between the growth signal dates. Section 4 discloses how the new signals could be of use in forecasting changes in interest rates. Section 5 provides a summary of the principal findings