An Inflation-forecasting Model 79

During periods of high or rising inflation, it is especially valuable to gain the ability to discern in financial and market reports the part that simply reflects the depreciation of the dollar and to deduct it from the nominal signal in order to extract the embedded real economic signal. The inflation forecasting model is based on a simple regression equation relating observed consumer inflation—the change in the consumer price index—over the course of a year to the six predictive factors at the start of the year. The out-of-sample period consists of the decade since the end of the estimation period, and over the course of that time the author made no change at all in the forecasting equation. Attribution is simply a vector of partial effects obtained by applying the vector of month-to-month changes in the factors to the vector of partial derivatives of the equation with respect to the factors.