Inside the Crystal Ball: How to Make and Use Forecasts

Chapter 10What Will It Cost to Live in the Future?

Inflation is repudiation.

—Calvin Coolidge, Speech, Chicago, January 11, 1922

Consumer spending projections may be crucial for business, but for households, the single most important forecast is the cost of living. The amount by which daily expenses might rise is the key consideration when planning for future contingencies and retirement. Defining an adequate level of personal saving, and selecting appropriate categories of investments, hinge on expectations of future inflation. A belief in accelerated longer-term inflation, for example, is apt to trigger higher current savings to fund a more expensive future cost of living. On the other hand, anticipated lower near-term prices can postpone consumption.

Firms' success or failure will often turn on the behavior of business costs versus pricing power. For securities analysts and investors, forward guidance on pricing can play an important role in their valuation of a company's public securities. When firms have the ability to control prices, for instance, they may set those prices to discourage competitors from entering their territory.

From a politician's perspective, too much inflation can be more harmful to reelection prospects than excessive unemployment. Even during major recessions, only 10 percent of the labor force is unemployed. However, the well-being of all constituents depends, at least partly, on inflation's containment.

For monetary policymakers, inflation has to ...