Forecasting the inflation rate is critical for financial planning for both companies and individuals. Without an accurate gauge of the rate of inflation we are unable to accurately forecast our actual expenses. Forecasting the Inflation rate is also critical in decision making for stock valuations.
Unfortunately, forecasting inflation rates is about as easy as forecasting the weather. And for primarily the same reasons. When forecasting the weather there are a wide variety of factors to consider and the same holds true for forecasting the inflation rate.
In its simplest terms inflation is caused by an increase in the money supply. A simple example is that of an island with ten people on it and each person has $1. and one item for sale. Simple mathematics tells you the average price for each item would be $1.
Now suppose you wanted to make everyone richer so you gave each one another dollar. There are still only 10 items for sale but now there is $20 to spend so the average price would now be $2 This means the price doubled, so no one is any richer because they can still only buy one item with their $2.
So it becomes obvious that increasing the money supply will increase the inflation rate. So one would think that simply tracking the money supply would allow you to easily forecast the inflation rate. However, there are a variety of definitions of "money supply" so forecasting becomes more difficult. To make matters worse recently the government stopped tracking the money supply see Good-bye M3.
Forecasting is also made more difficult by the fact that we have a world wide economy now. The available money supply can be affected by a wide variety of things from as far away as China. For instance our forecast would be radically affected if China were to decide one day to dump the billions of U.S. dollars it is currently holding as reserves.
Imagine increasing the money supply of available dollars by a Billion dollars overnight simply because China decided it would rather hold Yen or Euros. In today's economy that is a distinct possibility.
Our Inflation Rate Forecasting Method
Our inflation rate forecasting method is different. Since 1997 we have been using the Moore Inflation Predictor (MIP) to forecast inflation one year out. It has proved extremely accurate in forecasting the twists and turns in inflation as calculated by the most commonly used inflation index the CPI-U.
The Moore Inflation Predictor provides a technical forecast of the inflation rate by month for the next 12 months. We do this by combining elements of trend-following and reversion to mean. We update the forecast chart monthly as new CPI inflation data becomes available.
See the Moore Inflation Predictor for Accurate Forecasts of the Future level of Inflation.
See our complete listing of Articles on inflation, including:
Inflation adjusted Gasoline Prices near all time highs
Knowing the 17 year trend in inflation can make you a fortune!
- Too much Credit card debt? Read this article on How to save $1000 a year on interest and pay off your cards faster.
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- Inflation Definitions
- Which is better High or Low Inflation?
- How to Calculate Inflation
- What is Inflation?
For Consumer Price Index data go to the Historical CPI page.
If you would like to calculate the inflation rate between two dates, use our handy easy to use Inflation calculator or you might prefer to use our Cost of Living Calculator to compare the costs in two cities.
You can find links to Inflation and Consumer Price Index data for other countries HERE. A chart of Inflation by decade, Annual Inflation, Gasoline Inflation, International Inflation Rate Links and Confederate Inflation is also available.
You might also be interested in the wide variety of articles on our sister site Financial Trend Forecaster like the article on Finding the right Mortgage, or Developing a Millionaire Mind, a complete list of the articles on Financial Trend Forecaster is at the FTF Article Archives.
We also post the previous Inflation Rates in our Historical Inflation Tables. The Historical Consumer Price Index is also available in table format. What's the Difference Between the Consumer Price Index and Inflation? You can instantly see the current inflation trend in our chart of the Annual Inflation Rate.
Interestingly, over time Webster's definition of Inflation has changed. But the Method of Calculating the Inflation Rate has not.
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