Assessing the Predictive Power of Alternative Indicators of Inflation

Document Type

Article

Language

eng

Format of Original

5 p.

Publication Date

9-2011

Publisher

Taylor & Francis (Routledge)

Source Publication

Applied Economics Letters

Source ISSN

1350-4851

Abstract

This article examines two different measures of wages as predicators of prices in a Vector Error-Correction (VEC) framework using quarterly data for the United States for the period from 1947Q1 to 2008Q1. Based on cointegration and a series of exogeneity tests, it is found that (i) there is a stable, long-run relationship between the Consumer Price Index (CPI) and the Personal Consumption Expenditures Deflator (PCED) on the one hand and Unit Labour Cost (ULC) and Average Hourly Earnings per Unit of Output (AHE) on the other; (ii) ULC is weakly exogenous for both price indices while the two price indices are weakly exogenous for AHE; (iii) ULC is strongly exogenous for CPI but not for AHE; and (iv) ULC is super exogenous for CPI. Taken together, these findings lead to the conclusion that ULC is a reliable indicator of price inflation but productivity-adjusted hourly earnings is not. Thus, monetary policymakers are justified in using information about the behaviour of ULC in formulating policy actions for achieving the goal of price stability.

Comments

Applied Economics Letters, Vol. 19, No. 10 (September 2011): 981-985. DOI.

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