Annual Inflation… Down
Monthly inflation at 0.41% was still very high for a month in the fourth quarter, which is traditionally negative or at least very close to zero.
But although high, October 2022 monthly inflation was still lower than in October 2021. So…
Annual inflation for the 12 months ending in October 2022 fell to 7.75%.
This was down from 8.20% in September 2022.
Notable increases (highlighted in red) included Food away from home, Energy, Fuel Oil, Shelter, and Transportation Services. Decreases (in green) included Used Vehicles, Apparel, Energy Services, and Utility Gas.
The chart below from the St. Louis FED shows the CPI-U for 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 are generally significant drops in the oil price, like in early 2020 when oil prices went to zero. Previous peaks were 5.60% in July 2008 and 6.29% in October 1990. The last time inflation was higher was in December 1981 when it was 8.92%, but in those days, it had declined from 14.76% in March of 1980.
From this chart, we can see what inflation looks like without food and energy (i.e., “core inflation“)… NOT that people can live without food and energy, but food and energy are the most subject to external forces outside the monetary effects of the FED… i.e., OPEC, weather, and wars. We can also see that food and energy are primary components in the current inflation scenario. And if we look at the current geopolitical situation with the war in Ukraine causing both food and energy shortages, this makes sense. So if that issue can be resolved, inflation could fall by a couple of percentage points. Not that 6% inflation is great, but it is certainly a lot better than 8% inflation!
Source: St. Louis FED
In this chart from the U.S. EIA, we can see the extent of the recent strategic petroleum reserve drawdown compared to those of Desert Storm, various hurricanes, and other supply disruptions.
Inflation Chart since 1989
Beginning in 1989, the longer-term trend was downward until 2021.
(Note the declining “previous resistance” line.) But…
(click on chart for larger image)
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Data Source: US Bureau of Labor Statistics CPI-U
Early in 2021, inflation started spiking and quickly broke through the channel’s top 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. For some unknown reason, the FED didn’t even consider tapering its QE until January 2022, which became effective in March. See FED’s Tightening Too Little Too Late.
Current Annual Inflation Commentary
The Current Annual inflation Rate for the 12 months ending in October was 7.75%. This was down from September’s 8.20%, August was 8.26%, July was 8.52%, and June was 9.06%, the highest level since November 1981, when it was 9.59%. So there has been some improvement over the last few months.
It is hard to imagine that as recently as January 2021, annual inflation was only 1.40%, and now that looks more like a single month (March was 1.34% and June was 1.37%).
At 0.84% (January), 0.91% (February), and 1.34% (March), monthly inflation was high even for the first quarter of a year when monthly inflation is already at its highest. April came in at a more typical 0.56%, below April 2021’s level. Typically, monthly inflation is highest from January through May, often in the 0.30% to 0.50% range.
Typically, in June, inflation moderates into a lower range, but this time monthly inflation in June was high, i.e., 1.37%. And two-month inflation for May and June was 2.49%. But lower gas prices knocked July’s monthly inflation down to negative territory (i.e., disinflationary), although it was virtually zero.
Usually, from October through December, monthly inflation is very low or even negative, helping to reduce annual inflation. But, as we can see from the table below, 2021 was consistently above that range. Monthly inflation for October 2022 was 0.41% which is very high compared to the typical October, but below October 2021, so annual inflation did decline. If November and December remain at that monthly level annual inflation will actually increase slightly.
|Monthly Inflation Table:|
In the chart below, we can see how the monthly inflation compares between 2019 (light green), 2020 (light blue), 2021 (pink), and 2022 (red). We can see that virtually every month in 2021 was above the corresponding month in 2020, but in 2022, April, July, August, September, and October were below 2021’s level.
2022 Annual Inflation
|June & September 2021||5.39%|
The current inflation has its roots in the COVID crash of 2020. The FED was concerned with a market meltdown due to falling oil prices and the Coronavirus. So, the FED embarked on an unprecedentedly massive money creation scheme of Quantitative Easing (QE4). Although June 2020 saw a reduction in FED Assets, beginning in July, the FED started increasing assets again. (See FED Actions below).
Historically, if inflation climbs toward 3%, the FED gets worried. This 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 and further fanning the flames of inflation. This time the FED abandoned all common sense and called rising inflation “Transitory” while ignoring the signs and continuing its Quantitative Easing in the face of rising inflation (the monetary equivalent of throwing gasoline on a fire).
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 downward. Then in April 2021, inflation broke above the upper resistance of the pennant.
In April 2020, we published the March chart showing that FED assets could easily reach 9 or 10 Trillion…
On November 2nd, FED assets were down to 8.677 Trillion. As we can see from the chart below, that is still merely a drop in the bucket.
Source: FED Assets
As of this writing, supply chain issues, labor shortages, and Russia/Ukraine issues prevail to see even more inflation. As we’ve been saying for months, the stock market will suffer and give back much of its gains as the FED begins tapering.
See: NYSE ROC commentary for more info.
Inflation Since 2010
Up until 2021, 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 July 2009 was the bottom, with higher lows in April 2015 and May 2020.
The last quarter of the year typically sees disinflation, i.e., low or even negative monthly numbers moderating the annual inflation rate.
Before 2020, the FED could use Quantitative Easing because there were massive deflationary forces in the market. But then, in 2021, without those deflationary pressures, Congress continued to push for more “stimulus” despite the FED’s reluctance to go along. Ultimately, Congress got its way, and now inflation is surging. One day maybe Congress will realize “there ain’t no free lunch,” i.e., you can’t just print money without consequences.
Remember, as recently as March of 2021, FED Chairman Jerome Powell said inflation was “transitory” and NOT a problem. However, at the time, we said that was VERY unlikely. So with the transitory idea in vogue, the FED went merrily on its way, creating trillions more via Quantitative Easing.
Data Source: US Bureau of Labor Statistics CPI-U
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 through February 2022, it increased assets and kept interest rates very low. With inflation at over 7% (i.e., well over the FED target of 2%), they finally decided to curtail their massive stimulus of 1.9 Trillion… by tapering. (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.
History of Quantitative 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 newly created 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 through February 2017, convincing the FED that it was safe to raise rates 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 increase 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 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 just a typical 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. But now we are feeling the consequences of all that money pumping.
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 the rapid increase in current interest rates. In February 2022, they were just 0.08% eight months later, they are a full 3% higher. They have now exceeded the FED Funds Rate peak of 2.42% from January 2019 through July 2019. At that time, 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 1/10th of 1% in July 2021. But in August, the FED decided to lower it to 0.09%, then in September through February, the FED held the rate at 0.08%. It more than doubled to 0.20% for March, but it is still relatively insignificant in the grand scheme of things, i.e., less than 1/10th of what it was in 2019.
Although the current rise is the fastest in recent memory, it still has a long way to go. Back in May, Ex-Fed Vice Chair Richard Clarida Said Rates Must Rise to at least 3.5% to get inflation under control, but now the consensus is they will probably have to go to at least 5%. Jeffrey Tucker tells us that “real short-term rates need to be positive,” i.e., you can’t be investing at a lower rate of return than inflation. So if inflation magically falls to 5%, interest rates have to be more than that! So even 3.5% is too low. So, although the short-term chart (above) looks bad, taking a longer-term view (below) gives an entirely different picture. In this view, rates are still historically low, with only three brief periods prior to 2008 below these levels.
- Inflation Adjusted Gasoline Hits New High (almost )
- Worldwide Inflation by Country 2022
- Roots of Our Current Inflation
- The Fed’s New “Tightening” Plan Is Too Little, Too Late
- Keynesians and Market Monetarists Didn’t See Inflation Coming
- Inflation Expectations and the Massive Fed Stimulus
- 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.
Annual Inflation Table:
- 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?
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.
See monthly Inflation for a table of all the individual months since 1913.
Cost of Gas:
A significant component in Consumer Price Inflation is the price of energy, primarily gasoline for consumer’s vehicles, but also heating oil and Electricity (which are 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 had ticked up again slightly and averaged $2.343/ gallon.
In January 2016, the nationwide average was $1.87, then it fell to $1.71 in February but rose to $1.96 in March. Of course, prices vary widely 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 petrodollar affects oil prices. 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 are higher.
- 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
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 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 apparent long-term effects are a society with more debt than it should have, and thus we see crashes as 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 – to 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 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 simultaneously 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 stopped entirely.
In the video, What is the Real Purpose of the Federal Reserve? Edward Griffen reminds us that the Federal Reserve is 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 viewed 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.
At InflationData.com, we like to take our inflation numbers straight with as slight 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.
- Former Treasury Secretary Larry Summers on the Current Inflation Situation and Insufficient Labor
- How Quickly Can The FED Get Inflation Under Control?
- Spoiler: The FED Guaranteed To Fight Inflation… Sooner Or Later
- Why Quantitative Easing is Inflationary… Sometimes
- Millennials Have Never Seen Inflation This High
- How Nixon’s Revolutionary Move Affected Inflation for 50 Years
- What is Quantitative Tightening
The velocity of Money:
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.