This chart plots the Current Annual Inflation Rate starting in January 1990. The longer term trend is falling. Note the peak at 6.29% in October of 1990 while the Oil Peak in July 2008 was "only" 5.60%. Going back further (not shown) inflation peaked in March 1980 at 14.76%.
Is Inflation Rising or Falling?
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Monthly inflation for March was negative at -0.10% or an annualized -1.2% which was significantly lower than last April which was 0.30% so the annual inflation rate fell by 0.41%. In May of 2012 prices declined by -0.12% so if we don't get an equal or greater decline this year annual inflation will bounce back up again next month.
So far this year:
The retail cost of Gasoline (Regular) averaged $3.31 nationwide in January, then increased to $3.77 in February. By April the price had worked its way back down a bit to $3.52.
The annual inflation rate fell in January not because prices were down during the month but because they weren't up as much as they were in January 2012. Monthly inflation was up in February much more than February 2012 so annual inflation climbed from 1.59% to 1.98%. In March gasoline rose 1.4% but was still down -3.1% over the previous year.
Monthly inflation was high for January through April 2012. January was 0.44%, February was 0.44%, March was very high at 0.76% and April 2012 was 0.30%. The trend broke in May as inflation fell to negative territory (monthly deflation, annual disinflation) giving back a bit of the price increases. June continued the trend with another negative month knocking the Annual inflation rate down from 1.70% in May to 1.66% in June. And July followed up with another decrease to 1.41%. The next three months were inflationary August brought the inflation rate back to 1.69%, September rose to 1.99%, and October rose to 2.16%. November and December were disinflationary (monthly deflation) at 1.76% and 1.74% respectively.
Historically, inflation seems to be higher the first half of the year and then lower or even negative the second half. We have to go all the way back to 2003 to find a single negative month in the January through April months. While the second half of almost every year has at least one negative month.
As a matter of fact, in the months since January 1954 there have been 13 negative months in January through June and 46 negative months in the July through December months. So it appears that the majority of inflation occurs in the first half of the year and then moderates for the second half. One possible explanation is that during the fourth quarter many stores hold massive sales (think Black Friday) to reduce inventory before year end.
In 2012 deflation began earlier i.e. shifted from the end of the year to the middle of the year (May - July) with August and September positive and October and November negative again.
Quantitative Easing and Inflation
On November 25, 2008, the Federal Reserve announced that it would purchase up to $600 billion in agency mortgage-backed securities (MBS) and agency debt.
In December the FED cut interest rates to near Zero.
In March 2009, the FED announced that it would purchase another $750 Billion in junk mortgages (Mortgage Backed Securities) and $300 Billion in Treasury Securities primarily because the rate of inflation was still heading down.
Often there is a lag in the effects of money creation but as QE1 ends the inflation rate once again begins dropping, spending much of 2010 at just over 1%.
So the FED decides QE2 is necessary and it purchases another $600 Billion of Longer Term Treasury Notes. This increases the inflation rate to almost 4% but when it stops the inflation rate begins falling again. Personally, I would love to see the inflation rate stay between 1 and 2% or better yet between 0% and 1%. In the long run low inflation rates benefit everyone as people can accurately judge their future costs and make sound business decisions. But the government prefers a higher inflation rate so it can repay its debts with "cheaper dollars." Inflation also erodes savings and causes consumers to act imprudently and spend more than they would if they had sound (unchanging) money. This is what the government means by "stimulating the economy" i.e. causing people to spend more than they would prudently do otherwise. The obvious long term effects are a society with more debt than it should have and thus we see crashes like we saw in 2008. Then the government has to "do something" so it prints more money to fix the problem it created by printing money in the first place. For more detail see: Stimulate the Economy? Please Don’t!
On September 21, 2011 the Federal Open Market Committee announced Operation Twist.
On September 13, 2012 the FED announced QE3 which was $40 Billion a month in purchases and on December 12, 2012 they announced an additional $45 Billion per month with no definite end in sight.
We've added QE1, QE2, Operation Twist and QE infinity to the chart so that you can see the effects in the inflation rate. These "Quantitative Easings" were not your typical FED money printing schemes. In QE1, which lasted from November 25th 2008 - March 31, 2010 the FED started by purchasing $500 Billion in Mortgage backed securities. Most of these securities were virtually worthless at this point. But just a few months earlier they were considered part of the larger money supply. So in effect the FED bailed out the owners of this junk debt and pumped up the money supply at the same time by converting worthless junk into "valuable" greenbacks.
In our video What is the Real Purpose of the Federal Reserve? Edward Griffen reminds us that the Federal Reserve is really just a bank cartel and it has its members interests at heart. So monetizing worthless jusk paper and bailing out the banks that held them makes perfect sense when looked at in that light. Operation Twist was announced on September 21, 2011 and it was designed to buy long term Treasury notes on the open market while simultaneously selling short term notes. This would have the effect of driving long-term interest rates down. This would help mortgage borrowers better be able to afford new homes.
Here at InflationData.com we like to take our inflation numbers straight with as little adjustment as possible so we only look at the non-adjusted numbers. So often you will hear different numbers quoted in the popular media because they usually use the "Seasonally Adjusted" numbers.
Many people believe that the "Official Government numbers" are fudged. See Can We Trust Government Inflation Numbers? and Is the Government Fudging Unemployment Numbers? and Employment vs. Unemployment for more evidence the Government is fudging the Unemployment numbers.
|Monthly Inflation Rate Table|
Blue indicates current components of the Annual Inflation Rate
Red = Deflation (falling prices)
-0.50% mo. = 6% Ann.
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. Conversely if a large monthly inflation rate is replaced by a smaller one, inflation will decrease.
February 2011 had a monthly inflation rate of 0.49% which was replaced by a 0.44% rate for February 2012 so the Annual inflation rate stayed virtually the same.
In early 2011, we saw a fairly large 0.41% monthly rate for March 2010 be replaced by an absolutely huge 0.98% for March 2011 which was replaced by a very large 0.76% in March 2012 but the Annual inflation rate in March 2012 fell from 2.87% to 2.65%.
April 2011 had a monthly inflation rate of 0.64% so the majority of the annual inflation occurred in the first half of 2011 and April 2012 was smaller at 0.30%.
May 2011 was a hefty 0.47% and it was replaced by a negative -0.12% for May of 2012. June 2011's -0.11% was replaced by June 2012's -0.15%, July's 0.09% was replaced by July 2012's -0.16%. August and September 2012 have been large replacing more moderate numbers from 2011 so the inflation rate is on the increase again.
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.
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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Velocity of Money:
Recent Inflation History-The Big Picture:
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 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 (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 picked up again and crossed above its moving average and above the blue linear regression line and took it out of the downtrend channel and began heading upward again. So July 2009 at -2.10% may have been the turning point and the bottom of the downtrend. For more information See: What is Quantitative Easing?
The average annual inflation rate for the entire period since 1913 has been 3.24% per year.
See Current Commentary above 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.
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. Each month the oldest month drops out of the calculation and a new month is added.
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. If the red line is pointing up we are in an inflationary trend. When the red line is pointing down we have "disinflation" i.e. prices aren't increasing as fast as they were before and when the black line falls below zero that is deflation (prices are actually falling).
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.
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.
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.
|Inflation Adjusted Prices:||Unemployment Data:|