Description
What is the best way to derive an expected inflation rate? Forensic economists that include expected inflation in their estimates are faced with this dilemma each time they prepare a report. Many economists use historical data. Thomas Havrilesky has criticized the use of historical data in forensic economic analysis ((Havrilesky 1990, p. 23). Other economists rely on indicators to forecast inflation. Their inflation figures are derived from the variability of certain indicators, like changes in commodity prices, changes in exchange rates, the spread between short term and long-term interest rates, or changes in capacity utilization or unemployment. Stephen Cecchetti, Rita Chu, and Charles Steindel have questioned the reliability of inflation indicators (Cecchetti, Chu, & Steindel 2000, p. 1). If Havrilesky is correct, then the use of historical data is suspect. If Cecchetti, Chu and Steindel are correct, then any one or even a combination of indicator variables is suspect. Where does this leave an economist attempting to estimate future inflation? The Treasury security market may offer a solution.
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