Inflation Trends since 1914

Knowing the 17 Year Inflation Cycle Can make you rich

April 24, 2006

Inflation like everything else it seems has cycles. It trends up for years and then for almost no reason begins falling again. After a while it rises again.

Unfortunately, while it is doing its long term dance it is bouncing up and down creating so much "noise" that it is difficult to see the longer term trend.

The chart to the right shows this trend by adding a 5 year moving average to the inflation rate. This smoothes out the noise so we can see the underlying trend.  And surprisingly it is actually quite regular.

Inflation Cycles Approx. Every 17 Years 

From the chart we can see that beginning in 1919 we had 14 years of declining inflation until the bottom in 1933. From there inflation increased for 14 years until  1947.

From 1947 until 1963 (16 Years) inflation rates trended down. And then for the next 19 years from 1963 until 1982 the moving average was in an uptrend. And just like clockwork the cycle ended and the moving average fell for the next 20 years until 2002.

So based on that, we can expect approximately 14-20 years of increasing inflation beginning in 2002.

Now that we know we are in an uptrend what good is it?

This information can be extremely valuable for our investment planning. Knowing that inflation will continue for several years yet, we can invest in hard assets like Oil and Gold and avoid paper assets like stocks and especially Bonds. Notice how near the peaks you have explosive Gold prices while at the bottoms you have explosive Stock and Bond prices.

We are just beginning the cycle but already over the last three years Gold and Oil have been top performers while Bonds have been the worst performer.

Of course, even when the long term trend is in place, the short term trend may be running counter. These are the times of opportunity for those who know the long trend. When everyone else thinks inflation is falling you can load up on inflation hedges at bargain prices and wait for the next leg up and the inevitable rebound.

(click on chart for larger image) 

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