A composite leading indicator of Australian inflation

Abstract

This paper investigates the possibility of constructing a composite leading indicator of Australian inflation. Five variables are considered and found to have both short-run and long-run causal linkages with consumer prices. A composite leading indicator is constructed on the basis of the coefficients of the cointegrating vector and smoothed by calculating a four-quarter moving average. This indicator is shown to have led the annual inflation rate in six troughs and five peaks between 1972 and 1992.