Popular Posts
Annual Inflation
This chart plots the Current Annual Inflation Rate starting in January 1990. The longer term trend (in Yellow) is falling. Note the peak at 6.29% in October of 1990.
Is Inflation Rising or Falling?
Check this Chart to find out
 |
|
|
See Current Commentary below for an explanation of what this chart is telling us about inflation now.
See the current MIP to read more about what we are predicting for next month and next year. Remember our projections are based upon sound mathematical formulas not on simply extending the current trend forever.
How to Read this chart:
The black wavy line represents the actual annual inflation rate as calculated from the Consumer Price Index (CPI-U) published by the U.S. Bureau of Labor Statistics.
The CPI creates a standard to compare against to help us determine the real purchasing power value of a Dollar because the level of prices is constantly changing due to increases (or decreases) in the money supply.
The red line is a 12 month moving average, meaning it is the average of the annual inflation rate as measured during the last 12 months. Each month the oldest month drops out of the calculation and a new month is added. (see Current Commentary Below).
By definition, whenever a line crosses through its moving average a change in direction is indicated. So when the black line crossed up through the red line in August of 2002 that indicated that inflation was no longer falling (disinflation) but was now in a uptrend (inflation).
The yellow long term trend line indicates we had been in a downtrend since the peak in 1990. The key point came in June of 2004 when the index crossed above the yellow line confirming the end of the inflation downtrend. So although the short term downtrend ended in August 2002 the long term disinflationary trend ended in June of 2004.
At 0% inflation the general level of prices of a basket of goods and services would stay the same from year to year.
If the inflation rate crosses below 0%, we turn from inflation to deflation since by definition "deflation" is a negative inflation rate. This is a relatively rare event, the last time that happened (before 2009) on an Annual Basis (prices were lower than year ago) was in 1955, although we have had deflation for a single month on a more regular basis (prices fell compared to the previous month). See What is Deflation? for more information.
If the inflation rate is simply trending down we call it "disinflation". An example of disinflation would be if the annual inflation rate is 3.2% the first month, 3.0% the second month and 2.8% the third month. See What is Disinflation for more information.
Recent Inflation History:
In mid-2002, at the depth of the recession, after registering a new low of just over one percentage point (1.07%), the inflation rate crossed back up through its moving average, indicating that the disinflationary period ha d ended and inflation was increasing again. (See Brown Trend Lines).
From there the inflation rate began a 6 year up trend, with consumer prices generally increasing primarily due to the central bank increasing the money supply.
The one exception to this monetary policy caused increase was a supply disruption due to hurricane Katrina (Katrina Spike)which was promptly followed by a corresponding decline in the inflation rate bringing the average level of inflation over a slightly longer period back within the upward trend. Following the Katrina spike was the oil spike. Which may also have brought the inflation rate to an artificial high (i.e. not based on monetary factors but supply factors) so as oil prices fell back to reality the inflation rate also began falling (disinflation), in order to return the system to balance around the linear regression line.
The blue trend-line is called a "Linear Regression" line and it shows the trend over time for the entire period. A linear regression line mathematically divides the chart so that exactly half the volume is above the line and the other half is below.
As we can see, the trend over the period of this chart (since 1990) is declining slightly (the Blue line is tilted downward).
We can also see the relationship between a rise in the prices of food and energy as oil prices drove the inflation rate up to a peak of 5.6% in mid-2008 and then as the Oil bubble burst it started the downward trend.
Finally, the housing market and the stock
market crashed reducing the money supply,
creating a liquidity crisis thus plunging
us into a period of deflation where prices
were actually lower than the year before,
reaching a deflationary low of
-2.1% in July of 2009.
Since then Inflation blipped up as a result of the Trillion dollar stimulus but then began slowly falling. Along came QE2 the second of Bernanke's monetary stimuli and inflation has picked up again and crossed above its moving average and above the blue linear regression line and took it out of the orange downtrend heading back toward the brown up trend.
The average annual inflation rate for the entire period since 1913 has been 3.24% per year
See Current Commentary below.
Current Commentary
Updated 1/19/2012
Annual Inflation:
Inflation was down slightly again this month
after increasing sharply from December
2010 through
May 2011. Monthly inflation rates peaked
at 0.98% (for one month!) in March 2011.
In June prices gave back a small portion
of that by declining
-0.11%
and in October
prices decreased
-0.21%.
November's decrease was slight by
comparison declining by -0.08%
while
December declined
-0.25%
i.e.
(1/4%).
The inflation rate is calculated based on the Consumer Price Index for all Urban consumers (CPI-U) the index was at 224.906 in April 2011 and 225.964 in May. Currently at 225.672 it has returned to levels lower than May but not as low as April. So we can see that of the Annual 2.96% inflation all of it occurred prior to May 2011. Since then we have had low or negative numbers except for August and September. As the high monthly rates fall out of the annual calculation over the next five months we can expect the annual inflation rate to continue to fall unless we start getting some more high monthly numbers. This does not mean that prices will return to levels of last January but simply that the Annual inflation rate number will look lower. In other words, if the CPI index stayed at the same level it is now through May, prices would stay the same and the inflation rate would work its way down to zero. If it stayed at these levels through September we would have deflation because the CPI index was higher in September 2011 than it is now.
But we expect to begin seeing the effects of QE2 in the inflaiton rates around July which should keep the annual inflation rate in positive territory. (See Quantitative Easing below).
On a short term basis, several moderating factors this month helped to hold down inflation including Lodging away from home (down 2%), Apparel (down 3.3%), and personal computers (down 2.3%).
The major factor though was Energy costs which fell -2.5%. While all items excluding energy rose 0.0% (i.e. were flat) for the month. Thus the above mentioned declining items canceled out other rising items and the decline was primarily due to falling energy prices.
Quantitative Easing
Legendary economist, Milton Friedman once said: "Inflation is always and everywhere a monetary phenomenon." In other words, inflation is always caused by printing too much money. But the results are seen in prices of commodities like food, clothing and energy after the printed money works its way through the economy.Generally, after a round of "Quantitative Easing" (aka. Money Printing) it usually takes one to two years for it to show up in popular pricing. The time lag gets smaller as people catch on to the cause and begins to anticipate more inflation. The time lag is also why some people fail to see the correlation between money printing and inflation.
In the case of QE1, the US Federal Reserve held $700–$800 billion of Treasury notes before the recession began. In November 2008, the Fed began buying $600 billion Mortgage-backed securities (MBS). By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reaching $2.1 trillion in June 2010.
So based on the 1 to 2 year timeframe you would expect inflation from QE1 to begin between March 2010 and March 2011 and if no more easing occurred, we'd expect it to end somewhere between June 2011 and June 2012.
As predicted, inflation began well within that target range. Inflation began in earnest in January of 2011 with a monthly rate of 0.48% (roughly 21 months after QE1 began). It probably started a bit slowly because of the massive deflation that was affecting the world-wide economy. And by mid-2011 the effects of QE1 began to peter out with October, November and December having monthly deflation.
Theoretically, since the QE1 money creation
spree lasted 19 months it is quite
possible that the inflationary effects
will last approximately 19 months. If
that is the case, we could still have as
much as another 6 months of inflation to go
from QE1. However, the evidence from the
end of 2011 seems to be that its effects
are primarily spent. But QE1 was not a steady
increase it had its ups and downs so we
can expect the inflation rate to fluctuate
as well. Although it appears that inflation
from QE1 has subsided we may still see
some effects between
now and July of 2012
with some up and down fluctuations.
QE2 began in November of 2010 and ended
in June of 2011. So we have an additional
8 months or so of monetary increases from
that. So if it follows the pattern of
QE1 we can expect the effects of
QE2 to begin roughly 21 months from
November 2010 or around July
2012. But because we
aren't in the throes of a massive
deflationary panic
(unlike when QE1 started) it may begin earlier, pick up quicker and
have a greater impact. And there has
been talk of QE3.
Between July and
December
2012 QE2 should kick in and then pick up again through August
2013. By that time we could see inflation
as high as 10-12% if the Euro crisis doesn't create
massive deflationary forces to
counteract it.
Inflation rates above 5% begin to cripple
the economy as we saw with the last Oil
spike. So as the higher monthly numbers continue
to drop out of the equation over the next
5 months we should see the inflation rate
continue to fall giving people a false
sense of security as they don't realize
the effects of QE2 are still around the
corner.
The only reason Inflation isn't 100 times
worse than it is currently is because the
Fed is paying banks to hold on to all that
money it printed.
Basically the FED created money out of
thin air and loaned it to the banks at
almost zero percent interest. The banks
turned around and loaned it back to the
government at about 3% interest to
finance the public debt. This
results in a hidden form of bank
bailout as the banks make 3% profit on
free money and the government can
pretend that it isn't bankrupt.
See: The Long Road to Inflation Perdition
To see some independent (non-government)
inflation numbers see our article:
Can We Trust the Government CPI Numbers?
Monthly Inflation:
| Monthly Inflation Rate Table | |
| Month | Monthly Inflation |
|---|---|
| January 2010 | 0.34% |
| February 2010 | 0.02% |
| March 2010 | 0.41% |
| April 2010 | 0.17% |
| May 2010 | 0.08% |
| June 2010 | -0.10% |
| July 2010 | 0.02% |
| August 2009 | 0.14% |
| September 2010 | 0.06% |
| October 2010 | 0.12% |
| November 2010 | 0.04% |
| December 2010 | 0.17% |
| January 2011 | 0.48% |
| February 2011 | 0.49% |
| March 2011 | 0.98% |
| April 2011 | 0.64% |
| May 2011 | 0.47% |
| June 2011 | -0.11% |
| July 2011 | 0.09% |
| August 2010 | 0.28% |
| September 2011 | 0.15% |
| October 2011 | -0.21% |
| November 2011 | -0.08% |
| December 2011 | -0.25% |
|
Blue indicates current components of the Annual Inflation Rate Red indicates Deflation (falling prices)
-0.50% monthly = 6% Annual Deflation |
|
By looking at the monthly inflation rate we can see the various components that make up the annual inflation rate.
The annual inflation rate is made up of the 12 most recent monthly rates. So when a small or negative (deflation) monthly rate is replaced by a large positive monthly rate we can see a significant jump in the annual inflation rate in a single month.
Recently we saw a fairly large 0.41% monthly rate for March 2010 be replaced by an absolutely huge 0.98% for March 2011. April 2011 had a 0.64% to replace a 0.17% from 2010. September through December 2010 are all low numbers if we replace them with more numbers like what we saw earlier this year we will have inflation jumping up by 1% a month!
A couple of months ago with Gold at $1600 an ounce I said,
"During the oil spike in 2008 inflation was 'only' at 5.6% so a couple of more months like this one could bring us back to that level and easily strangle the emerging recovery. It could also tank the stock markets and spike the price of gold up to $1800/oz. or higher."
Since then Gold went well over $1800/oz. but got a bit ahead of itself and so it fell back to consolidate a bit. In addition the commodities exchanges have raised margin requirements to squeeze some of the speculation element out of the precious metals.
See: Why $5,000 Gold May Be Too Low
See the current MIP to read more about what we are predicting for next month and the next year.
You may also be interested in knowing how to Calculate the Inflation Rate . Or you can simply use our Inflation Calculator to do the calculations for you.
To calculate how much purchasing power you would lose at other rates go to our Compound Inflation Calculator aka. Retirement Planning Calculator and you can see how devastating 6% or 10% can be to your retirement nest egg.
Complete list of monthly inflation rates since 1913
How much do you need to earn next year to keep up with inflation? See our Salary Inflation Calculator to find out.
Has this Chart been helpful? We appreciate your feedback.
Other Articles:
Stock Market- Stock Trends by Month
Rising Food Prices- Agflation- What is it?
Velocity of Money:
Inflation and Velocity of Money
Velocity of Money and Money Multiplier - Why Deflation is Possible
Also:
