Inflation Rate Forecast

Forecasting the inflation rate is critical for financial planning for both companies and individuals. Without an accurate gauge of the rate of inflation we are unable to accurately forecast our actual expenses.

Forecasting the Inflation rate is also critical in decision making for stock valuations.  

In its simplest terms inflation is caused by an increase in the money supply.  A simple example is that of an island with ten people on it and each person has $1. and one item for sale. Simple mathematics tells you the average price for each item would be $1.

Now suppose you wanted to make everyone richer so you gave each one another dollar. There are still only 10 items for sale but now there is $20 to spend so the average price would now be $2  This means the price doubled, so no one is any richer because they can still only buy one item with their $2. 

So it becomes obvious that increasing the money supply will increase the inflation rate. So one would think that simply tracking the money supply would allow you to easily forecast the inflation rate.  However, there are a variety of definitions of "money supply" so forecasting becomes more difficult.  To make matters worse  recently the government stopped tracking the money supply see Good-bye M3.

Forecasting is also made more difficult by the fact that we have a world wide economy now. The available money supply can be affected by a wide variety of things from as far away as China.  For instance our forecast would be radically affected if China were to decide one day to dump the billions of U.S. dollars it is currently holding as reserves. 

Imagine increasing the money supply of available dollars by a Billion dollars overnight simply because China decided it would rather hold Yen or Euros. In today's economy that is a distinct possibility.

Our Inflation Rate Forecasting Method

Our inflation rate forecasting method is different.  Since 1997 we have been using the Moore Inflation Predictor (MIP) to forecast the inflation rate one year out.  It has proved extremely accurate in forecasting the twists and turns in inflation as calculated by the most commonly used inflation index the CPI-U.

The Moore Inflation Predictor provides a technical forecast of the inflation rate by month for the next 12 months.  We do this by combining elements of trend-following and reversion to mean. We  update the forecast chart monthly as new CPI inflation data becomes available.

See the Moore Inflation Predictor  for  Accurate Forecasts of the Future level of Inflation.

See our complete listing of Articles on inflation, including: