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BPEA Article

Can the Inflation of the 1970s be Explained?


BY MANY STANDARDS inflation has been a "surprise" during the past six years. Errors in forecasting inflation have increased markedly compared with earlier periods. For instance, during the interval 1971:3 to 1975:4 the root mean-square error of the Livingston panel of economists in forecasting the consumer price index six months ahead was 3.5 percentage points at an annual rate, compared with an error of 1.6 percentage points over the previous seventeen years. Not only did the panel forecasters fail to predict the increased variance of the inflation rate in the 1970s, but also they fell far short in predicting the cumulative total price change between 1971 and 1976—24.0 percent compared with the actual change of 34.0 percent. Most of the error occurred during the four quarters of 1974, with an actual increase of 11.6 percent, almost twice the 6.0 percent increase forecast six months in advance.


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