Annual Inflation

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  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%. 

The average inflation rate for the entire period since 1913  has been 3.41% per year

Current Commentary-

Annual inflation is up almost 1% from last  month from 1.84% in November to 2.72% in December.  All of this in spite of the fact that monthly inflation was negative for the  month of December.

How can this be?  During December 2009 prices fell -0.18% for the month but annual prices rose because the previous December prices fell more -1.03%.  So annual inflation goes up by  the difference (0.85%). 

A couple of months ago, I introduced the mirror image chart.  The dotted line shows what would happen if  after bottoming in July the inflation rate's ascent mirrored the descent. For the first two months it was right on target. then it began rising more sharply than it had fallen.

On an unadjusted basis,
The Annual Inflation Rate was
(-2.10%)  in July,
(-1.48%) in August and
(-1.29%) in September
(-0.18%) in October
  1.84%  in November
  2.72% in December 

So on an annual basis prices are 2.72% above their levels of last year.  So we are back to inflation and above the linear Regression line for the last 20 years.

If you look at the monthly inflation rates in the table to the lower right you will see how December was the last large negative number to fall out of the calculation. 

Last month I said,  "This  will probably kick the annual inflation rate up about 1%  bringing the annual inflation rate up to about 3%."  But since this month's data was negative we "only" reached 2.72%.

For the next couple of months we could actually see inflation moderate a bit if we have something less than 0.44% monthly inflation the annual rate will actually drop. If we have a negative rate like this month we could actually see the annual inflation rate lose ½% next month. 

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.

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

(click on chart for larger image)

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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

The long term average inflation rate from 1913 through 2009  is 3.41%

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.