Alternative indicators for predicting the probability of declining inflation: evidence from the US

Abstract

The performance of inflation indicators for predicting the probability of inflation falling inside constant and moving targets is considered with a probit model using US data. Given the Federal Reserve System's emphasis on achieving price stability, particular attention is given to the target that future inflation will be below recent inflation. In contrast with earlier years, the unemployment and capacity utilisation rates do not perform well in forecasting the direction of inflation in the mid and late 1990s. We suggest that extending the Keynesian Phillips curve analysis to consider changes in labour market conditions, technological advance and worker skills, and openness will increase understanding of these issues.