nsider here is worker compensation and disposable personal income. The aggregate disposable personal income has been increasing over the recent economic prosperity. The key here is that the increases in income have been fairly stable. It is because of this stability that there appears to be little correlation when disposable personal income is regressed against inflation. Despite the low R^2 variable it still may be a worthy component to add to an inflation forecast. The growth of this economy has been very great, and this is support by strong consumer confidence. An area that would seem to contribute to this robust growth and inflationary pressure is the savings rate. Regardless of which indices or months one looks at, it is clear that personal saving in 1999 in considerably down from all other years. This may have an impact on the velocity of money and thus inflation in the future. The cyclical and irregular activity of the business cycle can be determined by detrending and deseasonalizing the real GDP data. (Appendix 4a) In doing so, one can see how the rates of inflation are correlated with that of the business cycle. The cyclical percentage changes in GDP serve as a good variable in inflationary forecasts because; significant amounts of real increase or decrease tend to be correlated with changes in inflation. When inflation is regressed against the cyclical increases in real GDP, the R^2 value is approximately 32%, indicating a moderate and useful amount of correlation. Therefore I have also include this variable in my forecasting models. Perhaps the most significantly correlated variable that I have come across is percentage changes in monetary velocity. This predictor shows R^2 percentages in excess of 76%. Clearly, fluctuations in the velocity of money have a significant effect on inflation. Once the inflationary pressures of the 1980's resided the velocity of money began its steady upward climb. Only in the last few years has ...
