Looking Forward on Inflation

Howard Simons, a contributor to the.Street.com’s RealMoney site, posted today an excellent analysis of inflation prospects.  RealMoney is part of the paid service of the site, but affordable for most investors.  Simons has an excellent background in business, finance, and economics, with a quantitative bent.

His article, entitled Macro Indicators Point to Lower Inflation, looks at several quantitative predictors of inflation, suggesting that forward-looking indicators provide a brighter view than those recording past or current conditions.  It is well worth a look — perhaps a reason to give the site a try.  He studies deficits, trade deficits, money supply, the yield curve, and other measures with appropriate lagged effects to show the inflation prognosis.  Very interesting and helpful!

Our only reservation is that Simons seems to feel that the Fed has a fixation with backward-looking goverment measures.  On the contrary, the Fed is well aware of the distinction.  Fed Governors are taking the measure of past actions, understanding the lags.

Policy makers have an important leadership responsibility.  At the Fed, the concern is control over inflation expectations.  Even "dovish" Fed members are expected to talk in terms of vigilance.  The written work of former Fed Governors makes this pretty clear.

Those serious about understanding inflation trends should read Simons article and compare it to some off-the-cuff martini or hamburger index and the like used by less sophisticated commentators.