This paper investigates forecasts of U.S. inflation at the 12-month horizon. The starting point is the conventional unemployment-rate Phillips curve, which is examined in a simulated out-of-sample forecasting framework. Inflation forecasts produced by the Phillipos curve generally have been more accurate than forecasts based on other macroeconomic variables. Phillips curve forecasts, however, can be improved upon using a generalized Phillips curve based on measures of real aggregate activity other than unemployment, especially a new index of aggregate activity based on 61 real economic indicators.
Sign up for Brad Delong's (general) mailing list