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Predicting Inflation
Yardeni Research, Inc.
January 31, 2019
Dr. Edward YardeniChief Investment Strategist
Please visit our sites atwww.yardeni.comblog.yardeni.com
thinking outside the box
Table Of Contents Table Of ContentsTable Of Contents
January 31, 2019 / Predicting Inflation: Chapter 4 www.yardeni.com
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Measuring Price Inflation 1-2Tolstoy Model of Inflation 3-4The Great Inflation of the 1970s 5-6Phillips Curve Model of Wage Inflation 7-8Phillips Curve Model of Price Inflation 9-11Output Gap Model of Inflation & NAIRU 12-13Monetarist Model of Inflation 14-16Microeconomics & the Future of Inflation 17-18
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24 26 28 30-3
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US CONSUMER PRICE INDEX(yearly percent change)
Dec
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1960s 1970s 1980s 1990s 2000s 2010s 2020s
Source: Bureau of Labor Statistics.
Figure 1.
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24 26 28 300
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US CONSUMER PRICE INDEX EX FOOD & ENERGY(yearly percent change)
Dec
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1960s 1970s 1980s 1990s 2000s 2010s 2020s
Source: Bureau of Labor Statistics.
Figure 2.
Measuring Price Inflation
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90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20.5
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Dec
Nov
CONSUMER PRICES(yearly percent change)
Core Inflation*
PCED**CPI
* Excluding food and energy.** Personal consumption expenditures deflator.
Source: Bureau of Economic Analysis and Bureau of Labor Statistics.
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Figure 3.
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24 26 28 300
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GDP DEFLATOR(yearly percent change)
Q3
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1960s 1970s 1980s 1990s 2000s 2010s 2020s
Source: Bureau of Economic Analysis.
Figure 4.
Measuring Price Inflation
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18001810
18201830
18401850
18601870
18801890
19001910
19201930
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100
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60
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100US CONSUMER PRICE INDEX*: 1800-1947
War of 1812(1812-1815)
Civil War(1861-1865)
World War I(1914-1918)
World War II(1939-1945)
* Annual data. Base index from 1800 to 1947 is 1967 = 100.** 1982-84=100.
Source: Census Bureau, Historical Statistics of the United States.
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19481958
19681978
19881998
20082018
2028
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OctCPI**
Cold War(1947-1989)
Figure 5.
57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 210
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VolckerRate Shock
ReaganFires PATCO
End OfCold War
ChinaJoins WTO
AmazonGoes Public
WalmartGoes Public
OldestBaby Boomers
Turn 65
Amazon WebServices
WidespreadFracking
CONSUMER PRICE INDEXEX FOOD ENERGY
(yearly percent change)
Dec
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Source: Bureau of Labor Statistics.
Figure 6.
Tolstoy Model of Inflation
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92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 205
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Oct
RETAIL SALES: GENERAL MERCHANDISE STORES (GMS) & ONLINE SHOPPING(as percent of total In-Store + Online GAFO*)
Percent of Total GAFO*Online**GMS: Warehouse Clubs & Super StoresGMS: Department Stores & Others
* GAFO (general merchandise, apparel and accessories, furniture, and other sales) includes retailers that specialize in department-store types of merchandisesuch as furniture & home furnishings, electronics & appliances, clothing & accessories, sporting goods, hobby, book, and music, general merchandise,office supply, stationery, and gift stores.
** Electronic shopping and mail order houses.Source: Census Bureau and Haver Analytics.
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Figure 7.
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 224
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1/25
US CRUDE OIL FIELD PRODUCTION(million barrels per day, weekly, sa)
Total (11.9)
Source: US Department of Energy and Haver Analytics.
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Figure 8.
Tolstoy Model of Inflation
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60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24 26 28 30-3
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US CONSUMER PRICE INDEX(yearly percent change)
Dec
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1960s 1970s 1980s 1990s 2000s 2010s 2020s
Source: Bureau of Labor Statistics.
Figure 9.
67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 842
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WEST TEXAS INTERMEDIATE CRUDE OIL PRICE1967-1984
(dollars per barrel, monthly, ratio scale)
* Shaded areas denote recessions according to the National Bureau of Economic Research. Monthly from 1946 to 1984, daily thereafter.Source: Haver Analytics.
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Figure 10.
The Great Inflation of the 1970s
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67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 842
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US CONSUMER PRICE INDEX &AVERAGE HOURLY EARNINGS: 1967-1984
(yearly percent change)
InflationAverage Hourly Earnings*CPI
* Production & nonsupervisory workers.Note: Shaded areas denote recessions according to the National Bureau of Economic Research.Source: Bureau of Labor Statistics.
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Figure 11.
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 215
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15
20
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10
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20
2018
UNION MEMBERS(as a percent of private wage & salary employment)
Private SectorUnion Membership
Source: Bureau of Labor Statistics.
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Figure 12.
The Great Inflation of the 1970s
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64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 220
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WAGE INFLATION & UNEMPLOYMENT RATE(using average hourly earnings)
DecDec
Average Hourly Earnings*(yearly percent change)
Unemployment Rate(percent)
* Production & nonsupervisory workers.Note: Shaded areas denote recessions according to the National Bureau of Economic Research.Source: Bureau of Labor Statistics.
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Figure 13.
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 225
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NFIB SMALL BUSINESS SURVEY: JOB OPENINGS & UNEMPLOYMENT RATE
Jan
NFIB: Small Businesswith Job Openings*(percent, 3-month average)
Unemployment Rate(percent)
Source: Bureau of Labor Statistics and National Federation of Independent Business.Note: Shaded areas denote recessions according to the National Bureau of Economic Research.
* First month of every quarter from 1974 to 1986, then monthly.
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Figure 14.
Phillips Curve Model of Wage Inflation
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74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 225
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WAGE INFLATION & SMALL BUSINESS JOB OPENINGS
JanNFIB: Small Businesswith Job Openings**(percent, 3-month average,12 months ahead)
Average Hourly Earnings*(yearly percent change)
* Production & nonsupervisory workers
** First month of every quarter from 1974 to 1986, then monthly.Note: Shaded areas denote recessions according to the National Bureau of Economic Research.Source: Bureau of Economic Analysis and National Federation of Independent Business.
Figure 15.
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20191.2
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Dec
Nov
AVERAGE HOURLY EARNINGS & QUITS RATE
Quits Rate* (2.5)
Average Hourly Earnings*(yearly percent change) (3.2)
* Private industry.Source: Bureau of Labor Statistics.
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Figure 16.
Phillips Curve Model of Wage Inflation
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58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 220
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CONSUMER PRICE INDEX & UNEMPLOYMENT RATE
Dec
Dec
Core CPI*(yearly percent change)
Unemployment Rate(percent)
* Excluding food and energy.Note: Shaded areas denote recessions according to the National Bureau of Economic Research.Source: Bureau of Labor Statistics and Bureau of Economic Analysis.
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Figure 17.
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20-60
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CONSUMER PRICE INDEXES: DURABLE GOODS(percent change)
USEurozoneJapanSwedenSwitzerlandTaiwanUK
Source: Bureau of Labor Statistics.
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Figure 18.
Phillips Curve Model of Price Inflation
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64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 220
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WAGES & PRICES(yearly percent change)
Dec
Average Hourly Earnings* (3.3)
Core PCED (1.9)
* Production & nonsupervisory workersNote: Shaded areas denote recessions according to the National Bureau of Economic Research.Source: Bureau of Labor Statistics.
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Figure 19.
58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22-6
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CONSUMER PRICE INDEX & UNEMPLOYMENT RATE
Dec
CPI Durable Commodities(yearly percent change) (0.1)
Unemployment Rate(percent) (3.9)
Note: Shaded areas denote recessions according to the National Bureau of Economic Research.Source: Bureau of Labor Statistics.
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Figure 20.
Phillips Curve Model of Price Inflation
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58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 220
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CONSUMER PRICE INDEX & UNEMPLOYMENT RATE
Dec
CPI Services(yearly percent change) (2.8)
Unemployment Rate(percent) (3.9)
Note: Shaded areas denote recessions according to the National Bureau of Economic Research.Source: Bureau of Labor Statistics.
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Figure 21.
Phillips Curve Model of Price Inflation
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49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 2390
95
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OUTPUT GAP: ACTUAL DIVIDED BY POTENTIAL REAL GDP(percent)
Q3
Note: Shaded areas denote recessions according to the National Bureau of Economic Research.Source: Congressional Budget Office and Bureau of Economic Analysis.
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Figure 22.
68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 2290
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RESOURCE UTILIZATION RATE & OUTPUT GAP(percent)
Resource Utilization Rate*
Output Gap**
* Average of all industries’ capacity utilization rate and employment rate, i.e., percentage of labor force that is employed.** Actual divided by potential real GDP in percent.
Source: Congressional Budget Office, Bureau of Labor Statistics, and Federal Reserve Board.
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Figure 23.
Output Gap Model of Inflation & NAIRU
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49 54 59 64 69 74 79 84 89 94 99 04 09 14 19 24 29 341
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Dec
UNEMPLOYMENT RATE vs NAIRU(NON-ACCELERATING INFLATION RATE OF UNEMPLOYMENT*)(percent)
NAIRUUnemployment Rate
* Estimated and projectedSource: Congressional Budget Office and Bureau of Labor Statistics.
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Figure 24.
49 54 59 64 69 74 79 84 89 94 99 04 09 14 19 24 29-6
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Q4
NAIRU* MINUS UNEMPLOYMENT RATE(percent)
* Non-accelerating inflation rate of unemployment.Source: Congressional Budget Office.
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Figure 25.
Output Gap Model of Inflation & NAIRU
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62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 222
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US MONEY MULTIPLIER(M2 as a ratio of Monetary Base)
Source: Federal Reserve Board.
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Figure 26.
62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 221.40
1.45
1.50
1.55
1.60
1.65
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1.90
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1.85
1.90
1.95
2.00
2.05
2.10
2.15
2.20
2.25
Q3
M2 VELOCITY(Nominal GDP as a ratio of M2)
Source: Federal Reserve Board.
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Figure 27.
Monetarist Model of Inflation
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98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20-1.5
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-.5
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Nov
PERSONAL CONSUMPTION EXPENDITURES DEFLATORS(yearly percent change)
PCED
Fed’s Inflation Target
HeadlineCore*
* Excluding food and energy pricesSource: Bureau of Economic Analysis.
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Figure 28.
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20-3
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CONSUMER PRICE INDEX: JAPAN(yearly percent change)
BOJ’s Inflation Target
CPI InflationHeadline (0.3)Core* (0.1)
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* Excluding energy, food, alcohol.Source: Ministry of Internal Affairs and Communications.
Figure 29.
Monetarist Model of Inflation
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98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20-1.0
-.5
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CONSUMER PRICE INDEX: EUROZONE(yearly percent change)
ECB’s Inflation Target
CPI InflationHeadlineCore*
* Excluding energy and unprocessed food.Source: Haver Analytics.
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Figure 30.
Monetarist Model of Inflation
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60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 220
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AGE WAVE & INFLATION
Inflation Trend**
Age Wave*
Source: Bureau of Labor Statistics.** Five-year percent change in CPI at annual rate.* Percent of labor force 16-34 years old.
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Figure 31.
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20505
10
15
20
5
10
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20WORLD: YOUNGER CHILDREN & OLDER ADULTS(percent of country or regional population*)
AgeUnder 565 & Older
* Estimates through 2015, then projections through 2050.Source: United Nations.
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Figure 32.
Microeconomics & the Future of Inflation
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52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 220
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PRODUCTIVITY: NONFARM BUSINESS(20-quarter percent change, annual rate)
Q3
Note: Shaded areas denote recessions according to the National Bureau of Economic Research.Source: Bureau of Labor Statistics.
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Figure 33.
Microeconomics & the Future of Inflation
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