Annual Inflation

Is Inflation Rising or Falling?

The 7.04% for December 2021 exceeded the 5.6% July 2008 peak and the 6.29% peak in October 1990. Inflation in December was very similar to June 1982, when inflation hit 7.06%. But then it was in the process of declining from a peak of 14.76% in March of 1980. The chart below from the St. Louis FED shows the CPI-U all items peaks since 1960 (Blue) plus the red line also shows the annual inflation rate minus food and energy. Where the blue line is below the red line is generally significant drops in the oil price like in early 2020 when oil prices went to zero.

Source: St. Louis FED

When oil prices are high like the Oil Peak in July 2008 it will lift total inflation.

Inflation Chart since 1989

Since 1989 the longer-term trend has been falling, (Note the declining Long-Term Linear Regression line.) But… 

Early in 2021 inflation started spiking and quickly broke through the top of the channel and then exceeded the pink previous maximum resistance line with barely a hiccup as it passed through. Of course, current levels are well above the FED’s 2% target and the FED said it will begin tapering its QE this month.

Current Annual Inflation Commentary

Annual Inflation:

The Current Annual inflation Rate for the 12 months ending in December was 7.04% up from November’s 6.81%, October was 6.22% significantly above September’s 5.39%.

It is hard to imagine that December 2020 inflation rate was only 1.36%. So inflation is more than 5 TIMES as high as last December’s rate.

Monthly Inflation

At 0.31% December’s monthly inflation was typical for the first quarter of a year when monthly inflation is at its highest. BUT it is very atypical for the 4th quarter when monthly inflation is often zero or negative. This entire 4th quarter has been much higher than average.  October’s monthly inflation was a massive 0.83%, compared to 0.04% in October 2020. November 2021 was 0.49% compared to -0.06% in 2020.

Typically monthly inflation is highest from January through May, often in the 0.30% to 0.50% range. And then, in June, inflation typically starts to moderate into a lower range, and then October through December is typically very low or even negative. But, as we can see from the table above, 2021 has been pretty consistently above that range.

In the chart below, we can see how the monthly inflation compares between 2019 (light green), 2020 (light blue), and 2021 (red). We can see that massive red lines replaced negative light blue lines for most of 2021. And was even higher than in 2019. Only in July and August, was blue slightly bigger than red which has helped the annual inflation rate to decline slightly for a couple of months in 2021. As we can see November 2020 was negative but was replaced by a hefty 0.49% in 2021. December 2020 was very small so almost any monthly inflation in December 2021 would have driven the annual inflation rate higher.

Inflation Peaks:

Previously, the FED had been concerned with a market meltdown due to falling oil prices and the Coronavirus. So, the FED embarked on a massive money creation scheme of Quantitative Easing (QE4). Although June 2020 saw a reduction in FED Assets, beginning in July, the FED began gradually increasing assets again. (See FED Actions below). 

Historically, if inflation climbs toward 3%, the FED gets worried, which generally results in raising the FED funds rate. If inflation reaches 5%, people start to worry and may spend faster, increasing the velocity of money, which can further fan the flames of inflation. This time the FED called rising inflation “Transitory” and ignored the signs and its Quantitative Easing in the face of rising inflation.

On the other hand, if inflation falls below 1%, it sparks FED deflationary fears and quantitative easing. (Although if low inflation results from increased productivity, it should be no cause for concern).

In the following chart, we look at a bit shorter-term (i.e., since 2000) and we see that although in the longer-term chart above there was a downward channel since 1989, in this chart, there was more of a “Pennant” formation (i.e., less volatility centering around about 1.4%). The COVID deflationary pressures caused the inflation rate in April 2020 to break below the previous “pennant” support, causing a new support line to be drawn, widening the pennant point and shifting the center down. Then in April 2021, inflation broke above the upper resistance of the pennant (dashed line). So we redrew the upper line at the new 5.39% peak, but now it has broken above that line as well.

In February, we said, “When the March and April 2021 numbers come out, we could easily see a breakout to the upside. But Congress is pushing a 1.9 Trillion stimulus package. This could result in massive inflation since there is no crash to absorb all that excess liquidity. The question will be if the stock market inflates or consumer prices inflate instead.” As of this writing, supply chain issues prevail so we could see even more inflation. As the FED begins tapering, the stock market will probably suffer and give back much of its gains. See: NYSE ROC commentary for more info.

(click on chart for larger image)
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Data Source: US Bureau of Labor Statistics CPI-U

Inflation Since 2010

The downtrend on the chart since 2010 no longer exists! Up until a couple of months ago, the linear regression line was still tilted slightly downward. But the recent upward spike is dragging it ever upward. So looking at only this chart, it’s hard to believe that the long-term trend was down. This could indicate the beginning of a different long-term trend and that April 2015 was the bottom.

Typically the last quarter of the year sees disinflation i.e. low or even negative monthly numbers moderating the annual inflation rate.

Prior to 2020, the FED was able to use Quantitative Easing because there were massive deflationary forces in the market. But then in 2021, without deflationary pressures, Congress continued to push for more “stimulus” despite the FED’s reluctance to go along. Ultimately, Congress got their way, and now inflation is spiking. Interestingly, FED Chairman Jerome Powell said in March that inflation was “transitory” and NOT a problem. However, as we said at the time that was VERY unlikely. So with the transitory idea in vogue the FED went merrily on their way creating trillions more via Quantitative Easing.

Data Source: US Bureau of Labor Statistics CPI-U

FED Actions

In April 2020, the FED began to fight Deflation with a massive Quantitative Easing program and near Zero Fed Funds rates, and by June, the FED showed signs of slacking off. But since then, it has been gradually increasing assets and keeping interest rates very low. With inflation at over 6% (i.e. well over the FED target of 2%) I’m not sure how they continue to justify their massive stimulus of 1.9 Trillion… but at their last meeting they said they aren’t even considering tapering until 2022. (Note: tapering is just reducing the rate of increase not even reducing the money supply just not increasing as fast. This is similar to easing off the gas but not even considering touching the brakes as you head toward a crash. But the FED isn’t even considering doing that).

History of Quantitive Easing

The market crash of 2008 destroyed liquidity and created massive deflationary forces, so the FED began fighting against deflation through traditional means and then through Quantitative Easing. Then in November 2015, the FED switched sides and began slowly raising interest rates to fight against Inflation. From there, inflation rose from July 2016 – February 2017, convincing the FED that it was safe to raise rates a bit more aggressively.   On March 15, 2017, the Fed voted to raise its benchmark FED-funds rate by a quarter percentage point, to a range of 0.75% to 1% on the assumption that inflation was building (and because they were desperate to raise rates so they would have somewhere to go in the next recession). At its June 2017 meeting, they decided to raise it by another quarter percentage point bringing the benchmark rate to a (1.0% to 1.25%) range. Those were their target ranges.

Throughout 2018 the FED followed a policy of  Quantitative Tightening (QT) and raised the FED Funds rate that they charge banks.  QT is the opposite of Quantitative Easing. In “Quantitative Easing” (QE), the FED acquired government debt by buying it on the open market. QT is a process whereby the FED reduces the debt held by not renewing Federal Debt when it matures.

According to the National Bureau of Economic Research (NBER), the U.S. entered into a recession in February 2020 (shaded area) after the longest boom in economic history. According to NBER, the peak occurred in February 2020. Since unemployment was COVID-related rather than a normal slowing economy, economic activity picked up again rather quickly. In July 2021, NBER declared the bottom had occurred only a couple of months after the recession began. Thus giving us the shortest recession on record.

After the massive QE increase in March 2020, the FED tried tightening from June 10th through July 8^th, 2020. That small QT caused concern among many market analysts, but then the money began flowing again… as we saw a progressive stairstep increase through last month.

For more info see Composition of Fed Assets: St. Louis FED

See NYSE ROC for more info on how this may affect the stock market.

Federal Funds Rate:

The chart below shows that the FED Funds Rate peaked at around 2.40% from January 2019 through July 2019. Then the FED began fearing that it was holding too tight and the stock market was suffering, so it began easing. It leveled off in November 2019 at 1.55%, where it stayed until February 2020. COVID tanked the market at that point, and the FED loosened rates to virtually zero (actually 0.05%), i.e., five one-hundredths of a percent. It held relatively steady at that near-zero level until June 2021, when inflation started picking up, so the FED began tentatively raising it very slightly to 1/10^th of 1% in July 2021. But in August, the FED decided to lower it to 0.09%, then in September through December, it was even lower at 0.08%.

Data Source: Board of Governors of the Federal Reserve System (US)

See: Inflation Expectations and the Massive Fed Stimulus and Will the $2 Trillion Covid-19 Stimulus Cause Inflation? For a discussion on how this affects the stock market, see NYSE Rate of Change Commentary.

Previously the FED…

From the chart above, we can see that FED interest rates “stair-stepped” up throughout 2017 and 2018, and from February 2016 through January 2019, it increased sixfold.  The FED raised its Federal Funds Rate almost a full percentage point from January 2018 through January 2019 from 1.41% to 2.40%. By the fourth quarter of 2018, the markets got spooked due to the combined rising interest rates and Quantitative Tightening (QT). The FED promised to curb their “tightening”. But actually, their promise only included the FED Funds Rate since QT continued through September 2019.

So, the FED Funds rate leveled off during the first half of 2019.  But after July, the FED lowered the FED Funds rate significantly, falling from 2.40% in July to 1.55% by November. The FED held the FED Funds rate steady at 1.55% from November through January, increasing slightly to 1.58% in February.

 Annual Inflation Table:

See:

• America & Money: Cool Facts About the History of Our Monetary System
• The U.S. Economy, Payrolls & FOMC
• Is a Second OPEC Cut In The Cards?
• Are Oil Production Costs Rising or Falling?

Calculating the Current Inflation Rate

If we compare May 2020’s cpi index (256.394) with May 2021 (269.195), we can see a 12.801 point increase in the 12 month period. 12.801 / 256.394=0.049927, which when rounded to 2 decimal places and converted to a percentage equals 4.99% annual inflation.

Monthly Inflation/Deflation:

See monthly Inflation for a table of all the individual months since 1913.

Cost of Gas:

One of the major factors in Consumer Price Inflation is the price of energy, primarily gasoline for their vehicles, but also heating oil and Electricity (which is also dependent on oil prices).

Gas Prices Source: AAA

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 back down to $3.31, almost identical to January 2013 and January 2022. It increased again to $3.64/gallon in April 2014, with Premium averaging just under $4.00 nationwide.

But by January 2015, the nationwide average had fallen to $2.08, with some localities registering prices below $2.00/gallon. In February 2015, gasoline prices across the country had ticked up again slightly and were averaging $2.343/ gallon.

In January 2016, the nationwide average was $1.87, and it fell to $1.71 in February but rose to $1.96 in March. Of course, prices vary widely across the country due primarily to state taxes on gasoline. For instance, California imposes 38.13 cents per gallon taxes on gasoline in addition to the federal 18.4 cents per gallon tax, while many other states impose less than 20 cents per gallon.

In January 2017, several states adjusted their highway taxes. Pennsylvania already had the largest gas tax in the country, at 50.4 cents per gallon, but they increased it by another 7.9 cents per gallon on January 1st to 58.2 cents per gallon.

We have published several articles on how the Oil price is affected by the petrodollar. But gasoline prices are also affected by state and federal highway taxes. Historically Democrats have pushed for an increase in the 18.4 cents per gallon federal highway tax, which funds the Highway Trust Fund, the primary source for funding federal highway and transit programs. This would increase the price you pay at the pump, not just while gas prices are low but even if gasoline prices returned to previous higher levels.

See:

• 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

Annual Inflation:

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 inflation typically 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.

There is often a lag in the effects of money creation, but as QE1 ended, the inflation rate again began 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 on 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 December, Ben Bernanke began “tapering” which slowly shut off the flow of easy money, and by October 2014, the flow was totally stopped.

In the 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 member’s 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 have helped mortgage borrowers better afford new homes (but more importantly to the bank cartel) boost the demand for loans and the bank’s profit margins. To some extent, this has happened but probably not to the extent that they had hoped.

Note:

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.

Other Articles:

• Stock Market- Stock Trends by Month
• Rising Food Prices- Agflation- What is it?

The velocity of Money:

• Inflation and Velocity of Money
• Velocity of Money and Money Multiplier

The average annual inflation rate for the entire period since 1913 has been 3.15% per year. (Using Geometric Mean). For more information on the Geometric Mean, see: Inflation by Decade.

About Tim McMahon

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