December 1997 - Article - Notes on a composite leading indicator of inflation
Last Modified Date:
2020-10-01, 09:30 PM
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In many countries leading indicators are used to forecast turning-points in the cyclical movement of economic activity. Although equally deserving, leading indicators for the future evolution of price inflation have not attracted similar attention.The main objective of monetary policy is to protect the value of the currency. This task is complicated by the long and variable lags between changes in the monetary policy stance and its ultimate effect on inflation. The delay between changes in monetary policy and their full effect on inflation could be as long as two and a half years. This means that monetary policy decisions have to be forward-looking and that policy-makers should avail themselves of information which could provide insight into future inflation. Reliable forecasts of inflation are therefore important. The aim of this note is to introduce and propose a composite indicator that should be capable of foreshadowing movements in inflation. The purpose is not so much to forecast the magnitude of inflation, but merely to indicate important possible changes in the direction of inflation.