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.
Has this Chart been helpful? We appreciate your
feedback.
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. |