Annual Inflation

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Is Inflation Rising or Falling?

Check this Chart to find out

This chart plots the Current Annual Inflation Rate  starting in January 1990. See the longer term trend (in Yellow).  Note the peak at 6.29% in October of 1990.  

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 trend 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 (for a whole year) was in 1955, although we have had deflation for a single month on a more regular basis.  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, 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 had 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 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 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. Inflation has been slowly returning. 

The average annual inflation rate for the entire period since 1913  has been 3.39% per year

Current Commentary-

Annual Inflation:

Annual inflation is down from 2.63% in January to 2.24% in April to 2.02% in May to 1.05% in June. This is "disinflation" when the rate of inflation decreases. Once the inflation rate falls below zero it is called deflation again (as we had in 2009, shown by the blue box). 

The current inflation rate has returned to the long term down trend that began in 1990 but was interrupted by a six year uptrend from 2002 - 2008.

This is an excellent graphical demonstration of how we could be in for a period of deflation if the trend continues. This could resullt in a deflationary depression (see Velocity of Money and Money Multiplier - Why Deflation is Possible ).

Another possibility is that all the monetary stimulus could result in a hyperinflationary depression but either way we end up with a depression.

Of course, the optimists say we could have a "soft landing" and everything will be just fine, as the inflationary forces cancel out the deflationary forces, but it certainly doesn't look that way to me.

Monthly Inflation:

Over the last year inflation has been extremely moderate with only two highly inflationary months, June 2009 was a strong rebound off the deflationary lows with a monthly rate of 0.86%. This month as that fell out of the equation, it was replaced by a -0.10% monthly inflation (deflation) rate resulting in an almost 1% drop in the annual inflaiton rate.

If this trend continues we will enter another period of deflation, but this time it will not be a result of a panic in the stock market but a slow steady errosion of prices. As consumers cut back on expenses due to a rising unemployment rate demand for big screen TVs and other discretionary expenses falls putting downward pressure on prices.

Several months ago, I introduced the mirror image chart.  The dotted line shows what would happen if  after bottoming in July 2009 the inflation rate's rise mirrored the fall. For the first two months it was right on target. then it began rising more sharply than it had fallen. Now it appears to have leveled off and the opposite side was higher than we are currently.  So at first it appeared that inflation was winning and now it appears that deflation is gaining a foothold.

Click Chart for larger view

See the current MIP to read more about what we are predicting for next month and next year.

You may also be interested in knowing how to Calculate the Inflation Rate .

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.

 Click here for a larger image of the Annual Inflation chart.

All 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.

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Disclaimer:

At InflationData.com we are not registered investment advisors and do not provide any individualized advice. Past performance is not necessarily indicative of future performance and future accuracy and profitable results cannot be guaranteed.

Data Source: US Bureau of Labor Statistics CPI-U

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 For more information on Deflation see:

1. What is Deflation and When Does it Occur?
2. Price Effects of Inflation and Deflation
3. The Primary Precondition of Deflation
4. What Triggers the Change to Deflation?
5. Why Deflationary Crashes and Depressions Go Together
6. Financial Values Can Disappear in Deflation

Blue indicates current components of the Annual Inflation Rate

Red indicates Deflation (falling prices)

-1.92% monthly = 23.04% Annual Deflation
-0.50% monthly = 6% Annual Deflation
.10% monthly= 1.2% annual inflation
.20% monthly= 2.4% annual inflation
.25% monthly= 3% annual inflation
.50% monthly= 6% annual inflation
.85% monthly= 10.2% annual inflation
1.00% monthly= 12% annual inflation

Disclaimer:

At InflationData.com we are not registered investment advisors and do not provide any individualized advice. Past performance is not necessarily indicative of future performance and future accuracy and profitable results cannot be guaranteed.