Economics

Galloping and creeping inflation

In the summer of 1923, the German inflation was rapidly heading toward the grand finale: total repudiation of the currency. As an instructor in a Berlin college, this writer drew a monthly salary that had been raised from an inflated 10,000 marks or so in early 1922 to 10,000,000 marks by July, 1923, and the whole amount was being paid twice a month; then, once every week; then once each day.

 

It may be one of the most familiar words in economics. Inflation has plunged countries into long periods of instability. Central bankers often aspire to be known as “inflation hawks.” Politicians have won elections with promises to combat inflation, only to lose power after failing to do so.

After years of more or less continuous growth and relatively low macroeconomic volatility during the years named “The Great Moderation1, the US economy entered in December 20072 what seems to have been the deepest recession since The Great Depression3 The recession has been of relatively long duration and contained both a credit-crunch and a significant downturn in the housing market.

This has in turn resulted in rising unemployment and a monthly bankruptcy rate which has increased by almost 67%4 between Q3 2007, which was the quarter before the business cycle peak, and Q4 2008.

Because of the importance of understanding the status of the economy today to be able to predict the future, not all indicators need to be leading the economy. This means that not all indicators included in the approach will have strong predictive abilities. But as this is a forecasting approach, the assessment of the different indicators will always point towards their possible implications for the future.

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