The Determinants of Inflation

23 Pages Posted: 16 Jun 2022

See all articles by William B. Kinlaw

William B. Kinlaw

State Street Global Markets

Mark Kritzman

Windham Capital Management; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Michael Metcalfe

State Street Global Markets

David Turkington

State Street Associates

Date Written: June 13, 2022

Abstract

The authors apply a Hidden Markov Model to identify regimes of shifting inflation and then employ an attribution technique based on the Mahalanobis distance to identify the economic variables that determine the trajectory of inflation. Their analysis enables policymakers to focus on the most effective tools to manage inflation, and it offers guidance to investors whose strategies might benefit from knowledge of the prevailing determinants of inflation. Their analysis reveals that as of February 2022, the most important determinant of the recent spike in inflation was spending by the federal government.

Keywords: Baum-Welch Algorithm, Euclidean Distance, Hidden Markov Model, Mahalanobis Distance, Markov process, Regime Characteristic, z-score

JEL Classification: C10, C13, C40, C50, C54, C60, E40, E44, E50, E52, E58, E60, E62, E66, H60

Suggested Citation

Kinlaw, William B. and Kritzman, Mark and Metcalfe, Michael and Turkington, David, The Determinants of Inflation (June 13, 2022). MIT Sloan Research Paper No. 6730, 2022, Available at SSRN: https://ssrn.com/abstract=4137861 or http://dx.doi.org/10.2139/ssrn.4137861

William B. Kinlaw

State Street Global Markets ( email )

One Lincoln Street
Boston, MA 02111-2900
United States

Mark Kritzman (Contact Author)

Windham Capital Management ( email )

One Federal Street
21st Floor
Boston, MA 02110
United States
6174193900 (Phone)
6172365034 (Fax)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Michael Metcalfe

State Street Global Markets ( email )

One Lincoln Street
Boston, MA 02111-2900
United States

David Turkington

State Street Associates ( email )

United States

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