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Exact prediction of inflation in the USA

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  • Ivan, Kitov

Abstract

A linear and lagged relationship between inflation and labor force growth rate has been recently found for the USA. It accurately describes the period after the late 1950s with linear coefficient 4.0, intercept -0.03, and the lag of 2 years. The previously reported agreement between observed and predicted inflation is substantially improved by some simple measures removing the most obvious errors in the labor force time series. The labor force readings originally obtained from the Bureau of Labor Statistics (BLS) website are corrected for step-like adjustments. Additionally, a half-year time shift between the inflation and the annual labor force readings is compensated. GDP deflator represents the inflation. Linear regression analysis demonstrates that the annual labor force growth rate used as a predictor explains almost 82% (R2=0.82) of the inflation variations between 1965 and 2002. Moving average technique applied to the annual time series results in a substantial increase in R2. It grows from 0.87 for two-year wide windows to 0.96 for four-year windows. Regression of cumulative curves is characterized by R2>0.999. This allows effective replacement of GDP deflation index by a “labor force growth” index. The linear and lagged relationship provides a precise forecast at the two-year horizon with root mean square forecasting error (RMSFE) as low as 0.008 (0.8%) for the entire period between 1965 and 2002. For the last 20 years, RMSFE is only 0.4%. Thus, the forecast methodology effectively outperforms any other forecasting technique reported in economic and financial literature. Moreover, further significant improvements in the forecasting accuracy are accessible through improvements in the labor force measurements in line with the US Census Bureau population estimates, which are neglected by BLS.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2735.

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Date of creation: Jul 2006
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Handle: RePEc:pra:mprapa:2735

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Keywords: inflation; labor force; forecast; the USA;

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References

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  1. Ivan O. Kitov, 2006. "Inflation, unemployment, labor force change in the USA," Working Papers 28, ECINEQ, Society for the Study of Economic Inequality.
  2. Kirstin Hubrich, 2003. "Forecasting euro area inflation: does aggregating forecasts by HICP component improve forecast accuracy?," Working Paper Series 247, European Central Bank.
  3. Kitov, Ivan, 2006. "The Japanese economy," MPRA Paper 2737, University Library of Munich, Germany.
  4. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  5. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March.
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Cited by:
  1. Kitov, Ivan, 2009. "The anti-Phillips curve," MPRA Paper 13641, University Library of Munich, Germany.
  2. Kitov, Ivan, 2007. "Inflation, unemployment, labor force change in European countries," MPRA Paper 14557, University Library of Munich, Germany.
  3. Kitov, Ivan, 2007. "Exact prediction of inflation and unemployment in Germany," MPRA Paper 5088, University Library of Munich, Germany.
  4. Ivan Kitov & Oleg Kitov & Svetlana Dolinskaya, 2007. "Modeling Real GDP Per Capita in the USA: Cointegration Test," Mechonomics mechanomics1, Socionet.
  5. Kitov, Ivan, 2009. "Predicting the price index for jewelry and jewelry products: 2009 to 2016," MPRA Paper 15875, University Library of Munich, Germany.
  6. Kitov, Ivan, 2009. "Predicting gold ores price," MPRA Paper 15873, University Library of Munich, Germany.
  7. Kitov, Ivan, 2007. "Exact prediction of inflation and unemployment in Japan," MPRA Paper 5464, University Library of Munich, Germany.
  8. Kitov, Ivan & Kitov, Oleg, 2009. "A fair price for motor fuel in the United States," MPRA Paper 15039, University Library of Munich, Germany.
  9. Kitov, Ivan & Kitov, Oleg, 2009. "PPI of durable and nondurable goods: 1985-2016," MPRA Paper 15874, University Library of Munich, Germany.
  10. Ivan O. Kitov, 2010. "Inflation and unemployment in Japan: from 1980 to 2050," Papers 1002.0277, arXiv.org.

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