Monday, September 21, 2015

Maybe they'll know I'm joking around

Listlessly rummaging thru FRED data, I noticed they offer both "real" and "nominal" measures of potential output. The difference between them, I noted, is a measure of inflation.

Hmmm, I said to myself, if I subtract the one rate from the other, I can compare the result to inflation and see how accurate these things are. The fact that both series run from 1949 to 2025 -- ten years into the future -- made these datasets all the more interesting.

Graph #1: Inflation Embedded in Potential Output (blue) and Inflation (red)
Pretty darned accurate, I said to myself. Pretty darned accurate.

Close as the red and blue lines are, amazing as that is, it's nothing compared to the forecast for the 2015-2025 period. Let's get a close-up:

Graph #2: A Look at the Years Ahead
The faint vertical just after the end of the red line, that faint vertical shows where we are now, in the third quarter of 2015. Inflation is running at just under 1% annual, well below the Fed's 2% target rate.

Not to worry. Within six months, inflation will be up over 1.5% annual. And by the end of 2017 we'll be right on target, or just a hair over.

Most amazing of all, if you ask me, by 2018 inflation is in the zone and from there on out it is smooth sailing, with inflation solidly at the two percent level, consistently at two percent, and unwavering at two percent.


geerussell said...

"Listlessly rummaging thru FRED data"

Here are some pictures to liven things up... it's a wall of words but that's OK who reads these things for the articles anyway? The hot pictures are on pages 45-46 and 49-50.

The Arthurian said...

Thanks, Geerussell.

Not sure I understand those pics. But I think I understand their opening thoughts: "The monitoring of risks to financial stability has become an issue of first-order importance for banking supervisors and monetary authorities around the world. Such efforts are crucial ..."

It means what's important to them is to push finance as far as they possibly can, short of disaster. It's the wrong approach. One wants to halt the growth of finance at the first sign it is hindering growth. Not at the last sign.