Forecasting Inflation with Input Output Analysis

[Philip Copeman]

Inflation is a damaging economic force. Stable prices enable economic agents to make informed decisions. Once Inflation enters the equation, predicting future prices includes the problem of predicting future inflation.

The inflation game still presents modern governments with an ideal means of using deceit and unkept promises to get the greatest use of their expenditures and debt issues. Inflation is here to stay as long as it remains an important card in the game of economic policy.  Future prices of our competitor's products and our own input factors mean that forecasting inflation thus still has an important role in business forecasting.

The input-output analysis uses a linear sectoral method to model flows of resources across sectors. By introducing a period lag effect and with some simple matrix algebra the Input-output model can be rearranged to model cost-push inflation.

Large scale econometric models have fallen out of favor, and my dissertation of 1981 is now over 30 years old, but the Input-output method still provides a credible means of inflation forecasting.

Download the full 127-page explanation of how to use the model.