December 9, 2024
Greetings and welcome to Six Month Lag, a blog focusing on inflation, finance, and economics. I started the blog to promote my paper, Forecasting the Present: Optimal Lags for Contemporaneous Core PCE Inflation. The optimal lag for nowcasting core PCE inflation turned out to be 6 or 7 months at the time of this post. I make no promises regarding what future research will show for other time series. That said, the internet appendix to my paper shows that the six month annualized percentage change has lowest errors relative to centered one year inflation for headline CPI, core CPI, and unadjusted PCE inflation as well. So I am hopeful that I won’t have to change my website name.
Here’s a summary of the paper:
Percentage changes bracketing a given date gauge inflation best but can only be measured retrospectively. Geometrically annualized percentage changes over the previous 6 or 7 months provide the best timely approximation of underlying core PCE inflation according to a range of criteria. Decimal lags permit the optima to be stated with greater precision. Probabilistic modeling of inflation’s level and direction can be conducted using estimates of the error’s variance and kurtosis. A review of Federal Reserve statements during the COVID and post-COVID era suggests that greater focus on the geometrically annualized 6 month percentage change could have provided earlier warning of incipient inflation.
Future posts will march through some of the points of the paper in a conversational style. I also plan occasional commentary on monthly inflation data releases.