Growth-Inflation Signal Filter
Reduce every market input to its effect on growth and inflation
- Difficulty
- Easy
- Time to result
- ~days to results
- Steps
- 5
- Confidence
- 99%
The Growth-Inflation Signal Filter compresses a flood of economic and policy information into two questions: how does this change the rate of growth, and how does it change the rate of inflation? Growth direction helps reveal the likely earnings and economic backdrop. Inflation direction helps reveal central-bank policy and interest-rate bias. Each new release, tariff proposal, fiscal measure, employment report, or sentiment shift is passed through both questions. Information that materially changes neither axis is treated as noise rather than a reason to trade. The filter creates a stable analytical vocabulary during volatile news cycles and makes competing developments easier to compare. Its output is not a complete investment decision; it is a disciplined macro classification that can then be compared with valuations, risk premiums, and existing market expectations.
Origin
Lisa Shalett described this as Morgan Stanley's core method for separating market signal from noise on Masters in Business.
Core principles
- 01Focus on rates of change rather than isolated levels
- 02Classify information by its effect on growth and inflation
- 03Use inflation direction to infer policy and rate bias
- 04Discard information that does not materially alter either axis
- 05Apply the same questions consistently to every new data point
How to run it
- 1
State the new information
Summarize the data release, policy action, or event in neutral terms. Separate what occurred from commentary about it.
Pro tip Use one sentence before beginning interpretation.
Watch out Do not adopt the headline's emotional framing.
- 2
Score the growth effect
Determine whether the information raises, lowers, or leaves unchanged the expected rate of economic growth. Consider consumption, investment, employment, trade, and productivity channels.
Pro tip Focus on the direction and rate of change, not merely whether growth remains positive.
Watch out A high growth level can still be deteriorating.
- 3
Score the inflation effect
Determine whether the information raises, lowers, or leaves unchanged the expected rate of inflation. Distinguish temporary price shocks from persistent effects.
Pro tip Identify whether the effect comes through demand, supply, wages, or expectations.
Watch out Do not treat every one-time price increase as persistent inflation.
- 4
Infer the policy bias
Use the inflation and growth combination to assess likely central-bank and interest-rate pressure. Note whether policy makers face reinforcing or conflicting signals.
Pro tip Express the result as a bias, not a certainty.
Watch out Policy responses can lag or differ from the economic implication.
- 5
Compare with market pricing
Check whether valuations, yields, or risk premiums already reflect the classified outcome. A valid macro signal is not automatically an attractive trade.
Pro tip Ask what must happen for current prices to be justified.
Watch out Do not trade on information the market has already fully priced.
In the wild
A broad tariff is announced amid expensive equity valuations. The analyst classifies it as a potential drag on trade and business investment, producing a negative growth impulse, while higher import prices create a one-time positive inflation impulse. That combination suggests a difficult policy trade-off rather than a simple bullish or bearish headline.
→ The announcement is translated into comparable macro effects before any portfolio response is considered.
Common mistakes
Reacting to every headline
News that does not change the growth or inflation trajectory may be emotionally striking but economically irrelevant.
Looking only at levels
Markets often respond to acceleration and deceleration, so a strong absolute level can coexist with a weakening signal.
Skipping market expectations
Correctly classifying an event does not create an opportunity if prices already reflect it.
Is it for you?
Best for
It is best for investors, analysts, and advisors processing a high volume of economic information.
Not ideal for
It is not sufficient by itself for security selection or analyzing company-specific fundamentals.
From the transcript
“This is the art of all of it, is separating the noise in the signal.”
“what's really going on in terms of the rate of change? In growth and what is going on in terms of the rate of change…”
“what does this mean for growth? What does this mean for inflation?”
From the episode
Wealth Management and the 'Great Normalization' with Lisa Shalett
Lisa Shalett