Reply To: Chart showing a correlation between the TMS and inflation


Gross Domestic Product attempts to measure the production of all final goods and services in the economy. Gross Output attempts to measure all production, both of final and intermediate goods and services, in the economy. Although it might seem that the different components of these aggregates should move together, they do not do so in the face of time and uncertainty. For example, it might seem that Consumption and Investment expenditures should move up and down together making GDP = C + I a rather smoothly increasing statistic, one easily predicted by past trends. But the judgments persons make of their best courses of action change as they attempt to penetrate the fog of uncertainty. It’s well known that Investment expenditures vary more than Consumption expenditures over the business cycle. So a chart of Consumption would not correlate all that well with a chart of GDP over the cycle. The same thing can occur with respect to GDP and GO.

Take a look at the seminal work on Regime Uncertainty by Robert Higgs: