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Strategies & Market Trends : US Economic Trend Analysis

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To: gpowell who wrote (39)	4/13/2007 11:29:33 AM
From: gpowell	Read Replies (1) of 97

Much more to the point for making money, is the current and future path of real rates, i.e. ex-ante real rates. Unfortunately, in an economy with a “political” central bank, i.e. one that acts in part according to social policy considerations, it is only possible to approximate the value (of course without a “political” central bank the exercise would be unnecessary as one would only need to observe the market rate that prevailed). We can begin to approximate it by observing our adherence to the permanent income life-cycle hypothesis and note that changes in inflation expectations will influence planned purchases and hence alter current and future consumption patterns. This means that both the real rate and “CPI like” measures of inflation, which are based on current consumption, are functions of inflation expectations. A well-recognized principle is that the appropriateness of a price index depends upon the question being asked. As it pertains to calculating real rates of interest, we should appreciate that using CPI or any other current consumption measure, as proxies for inflation expectations, are not appropriate.

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