The objective of this article is to build better estimates of CPI headline and core inflation values so inflation comparisons over time are more reliable. The run-up in inflation we are currently experiencing is difficult to contextualize because it is inconsistent with past practices, weights on expenditures have changed, and the treatment of housing costs.
In this article, we examine the research on investing during inflationary regimes such as deflation, inflation, and stagflation. Factors perform relatively well in all regimes on a real basis.
Drawing on Italian tweets, we employ textual data and machine learning techniques to build new real-time measures of consumers’ inflation expectations. First, we select keywords to identify tweets related to prices and expectations thereof. Second, we build a set of daily measures of inflation expectations around the selected tweets, combining the Latent Dirichlet Allocation (LDA) with a dictionary-based approach, using manually labeled bi-grams and tri-grams. Finally, we show that Twitter-based indicators are highly correlated with both monthly survey-based and daily market-based inflation expectations. Our new indicators anticipate consumers’ expectations, proving to be a good real-time proxy, and provide additional information beyond market-based expectations, professional forecasts, and realized inflation. The results suggest that Twitter can be a new timely source for eliciting beliefs.
As the chief research officer of Buckingham Strategic Partners, the issue I am being asked to address most often is about fixed income strategies when yields are at historically low levels and inflation risk is heightened due to the unprecedented increase in money creation (through quantitative easing), the extraordinary expansionary fiscal spending around the globe, and the war in Ukraine driving prices higher (especially for food and energy). As always, to answer the question we turn first to the academic evidence on which investments in general provide the best hedges against inflation.