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%.Skip to:
Current Inflation Commentary, Monthly Inflation Commentary, The Big Picture- Recent Inflation History, How to Read this chart, Quantitative Easing
Is Inflation Rising or Falling?
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Data Source: US Bureau of Labor Statistics CPI-U
Current Annual Inflation Commentary
Annual inflation for the 12 months ending in January 2014 was a deflationary -0.09%. This is down from the 12 months ending in December which was 0.76% and November was1.32%. We have seen a steady decline in inflation since May when inflation was 2.13%, June declined to 2.07% then 1.99% in July, August was 1.70%, then September and October were both 1.66%.
In October we added a 2% dotted line to the chart to signify the FED "target". According to policy the FED is targeting a 2% inflation rate. As we can see from the chart over the last 25 years they have hit the target a total of 6 times out of more than 300 data points. If we count all the times they crossed the target or even got close we get a total of about 25 or about 8% of the the time.
The BLS Commissioner summarized the current situation this way:
" The Consumer Price Index for All Urban Consumers
(CPI-U) declined 0.7 percent
in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index decreased 0.1
percent before seasonal adjustment... The all items index declined 0.1 percent over the last 12 months, the first
negative 12-month change since the period ending October 2009."
Since the media tends to get all worked up about deflation this statement by the BLS Commissioner was surprisingly bland. But at -0.1% deflation (really -0.09%) it is barely deflationary at all, but when the 0.37% for February falls out of the equation if it is replaced by another negative number we will be well into deflation territory.
Over this past year food increased 3.2% while energy fell -19.6% on an unadjusted basis. The biggest gainers were Motor Vehicle insurance at 5.0% and Hospital Services at 4.3%.
The CPI index was 234.812 in December which represents actual lower prices (monthly deflation) than the 236.151 in November. Actually there has been a steady decline led primarily by oil prices from the peak in June at 238.343. The CPI was 237.433 in October which was down from 238.031 in September which was still lower than the 238.250 in July. The only increase was a small blip from August to September when the CPI went up from 237.852 to 238.031 for a monthly increase of 0.08% (i.e. less than 1/10th of 1%).
Monthly deflation (annual disinflation) means that prices are slightly lower than they were last month but still higher than a year ago, which typically happens a few times every year (generally in the 4th quarter), but this year prices began falling during the summer, indicating growing deflationary forces due to FED tapering (i.e. not inflating as much).
But now we have annual deflation (prices lower than a year ago). But this annual deflation is not the same nature as that of 2009 since that resulted from an implosion of the money supply (stock and housing market) while the current deflation is the result of lower energy prices. Most people will benefit from the current situation while most suffered in 2009. The one caveat of the current situation is that most of the job creation since 2009 has come from the energy sector and sustained lower prices could result in a loss of the primary driver for the current economy.
Monthly Inflation/Deflation:The majority of the inflation for the 2014 year resulted from 0.37% each in both January and February plus a massive 0.64% in March. April, May and June contributed a little as well at 0.33%, 0.35%, 0.19% respectively while September contributed a scant 0.08%. The remaining months were deflationary so they erased some of the gains of the first half of the year. Monthly deflation was -0.57% in December 2014, -0.54% in November, -0.25% in October, -0.17% in August and -0.04% in July. But as the January 2014 numbers fell out of the calculation and were replaced by a massive -0.47% the annual inflation became deflation.
Monthly inflation was virtually zero in December 2013 so when December 2014 came in at -0.57% it pulled the annual inflation rate down from 1.32% to 0.76%. Since January 2014 had high inflation i.e. 0.37% if we had another month like last month annual inflation would be totally wiped out and we would actually have annual deflation for the first time since October 2009 (i.e. the line on the chart would fall into the blue "deflation" field.
Overall energy on a "seasonally adjusted" basis was down -9.7% for the month and -8.2% on an unadjusted basis for the entire year. Fuel oil fell -9.9% for the month (adjusted) and a whopping -29.7% annually. Gasoline was down -18.7% monthly and -35.4% annually. On an annual basis electricity rose 2.5% and Natural gas fell -0.4%.
If we compare January 2014's cpi index which was 233.916 with January 2015 (233.707) we can see a -0.209 point decrease in the 12 month period. -0.209 / 233.916= -0.09%.
Historically speaking, on an annual basis inflation is very low. Deflation only rarely occurs on an annual basis although it is more frequent on a monthly basis. The last time we had deflation on an annual basis was in 2009 but prior to that it was 1954 and 1955.
Once annual inflation gets above 5% it becomes extremely troublesome for the economy. But with inflation so low in spite of the FED's efforts to print money some are saying that Deflationary forces are stronger than the FED.
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. 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.
If disinflation continues and 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 (where prices fell compared to the previous month).
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.
Cost of Gas:
The retail cost of Gasoline (Regular) averaged $3.29 nationwide in January 2013, then increased to $3.77 in February. By January 2014 the nationwide average price for regular gasoline was $3.31 almost identical to January 2013 then it increased again to $3.64/gallon in April 2014 with Premium averaging just under $4.00 nationwide. In January 2015 the nationwide average had fallen to $2.08 with some localities registering prices below $2.00/gallon. At the time of this writing, gasoline across the country has ticked up again and is averaging $2.343/ gallon. We have published several articles on how the Oil price is affected by the petrodollar but gasoline prices are also affected by state highway taxes.
- Death of the Petrodollar
- Total War over the Petrodollar
- More on the PetroDollar
- The current map of gas prices by county
- Gasoline Taxes by State
Inflation in 2014
2014 began with 1.58% annual inflation in January rising to 2.13%% in May. Although monthly inflation for the first two months was 0.37% each, at 0.64% March had almost as much inflation as the previous two months combined and settling back down to 0.33% in April and 0.35% in May. But annualizing that rate would still result in 4.20% annual inflation, while annualizing March's rate would result in a whopping 7.68% total inflation for the year. Fortunately the first quarter is usually the highest and then typically inflation decreases and often ends in deflation in the last quarter of the year. Monthly inflation was negative (disinflationary) every month from July through November except September when it was slightly inflationary 0.08%.
Inflation in 2013
2013 started at 1.59% then had a low of 1.06% in April with highs in February and July of 1.98% and 1.96% respectively. September fell back to 1.18% and October fell to a new low of for the year of 0.96%. November bumped up a bit to 1.24% and December finished the year at 1.50% not far from where it started.
See 2012 - 2013 Inflation Recap for more information.
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. This was the beginning of the Quantitative Easing program and later called QE1.
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 this time it purchases another $600 Billion of Longer Term Treasury Notes. The inflation rate increases to almost 4% but when QE2 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 steady 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 primarily has its members interests at heart. So monetizing worthless junk 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. Theoretically this should help mortgage borrowers better be able to afford new homes (but more importantly to the bank cartel) boost the demand for loans and the bank's profit margins.
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.
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.
For instance, 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.
But 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%.
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. See Monthly Inflation Table for all monthly inflation rates.
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.
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.
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 3.21% per year. (Using Geometric Mean). For more information on the Geometric Mean see: Inflation by Decade.
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.
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