Forecasting Inflation: Using the Moore Inflation Predictor©
By Tim McMahon, editor
Updated March 15, 2017
The Moore Inflation Predictor© (MIP) is a highly accurate graphical representation designed to forecast the inflation rate. By watching the turning points, we can profit from inflation hedges (like Gold, Real Estate and Energy Producers) when the inflation rate is trending up and from Bonds when the inflation rate is trending down. See Current Commentary below.
In addition, the Moore Inflation Predictor forecast could be used to judge whether to lock in a mortgage rate or wait a month or two for a better rate, since interest rates tend to track inflation rates fairly closely.
Inflation has had a wild ride over the last few years. As recently as July 2008 inflation was at 5.6% but by July of 2009 (only one year later) it had fallen to a negative -2.10% a fall of 7.7% in twelve months. Six months later by January 2010 it was back at 2.63% but it spent most of the end of 2010 around 1.15% coinciding with a low in mortgage rates of about 4.55% in November. Due to QE1 & 2 by August 2011 the inflation rate had worked its way up to 3.77% but from then through July 2012 both inflation and mortgage rates fell with Inflation hitting 1.41% and mortgage rates falling below 3%.
You would think forecasting the inflation rate would be difficult under those conditions but the Moore Inflation Predictor did fairly well (except on a couple of rare occasions).
In the following chart we can see how the Moore Inflation predictor has done over some of the crazy years we’ve just been through. The first chart is from April 2010 based on the March 2010 data. This chart was created in the midst of a Deflationary panic (thus the hypothetical thin blue line). Even though there was a sharp drop in the inflation rate the MIP did a good job of forecasting it, as the actual (thick blue line) shows. The actual inflation rate tracked the extreme low almost exactly and held it consistently for nine months. On the tenth month inflation moved back into most likely territory.
The next chart is from December 2011 with the blue reality line added ten months later in September.
Here we have a chart from January 2013 where we can see the performance over the year. We can see that the actual inflation rate has tracked the extreme low prediction almost precisely. Which fits well with the fact that Inflation has been lower than most economists and even the FED have expected. The one exception is Robert Prechter who has been touting Deflationary pressures. You can get Robert Prechter’s 90 page deflation survival guide free here.
The final chart is from December 2013 with the blue reality data line added through October.
To see how well the MIP has done in predicting inflation see some other previous MIP inflation forecasts with a reality line added.
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Current Inflation Forecast
February’s annual inflation rate was up sharply at 2.74% from January’s rate of 2.50%. Which was more than double August’s 1.04%. Our MIP was projecting an up move this month but didn’t project we would reach 2.74%. So inflation picked up faster than expected. Monthly inflation for January was a massive 0.58% and February was 0.31%.
This month, the MIP is projecting that we probably already saw most of the up-move in January and February so March should be much more moderate. Followed by a slight decrease over the following months. With a bit of a rebound later in the year. Although from the chart it appears that inflation could begin falling after mid-year. But it is also possible that if the 4th quarter picks up and becomes less negative, that the “tail” could still swing back up.
We’ve updated the current annual inflation chart which shows the Current Annual Inflation Rate starting in 1989. Over the months since the June 2014 peak in the CPI index, we have had thirteen months of monthly deflation (annual disinflation) i.e. where prices were slightly lower than they were the previous month. This typically happens a few times every year (generally in the 4th quarter), but in 2014 prices began falling during the summer, indicating growing deflationary forces due to FED tapering (i.e. not inflating as much). This resulted in six months of annual deflation where prices were actually lower than they were 12 months prior. The recent increase in inflation during January and February indicates that these deflationary forces have abated and inflation may be returning.
See Annual Inflation Rate Chart for more information.
There are some fairly consistent seasonal trends. The first quarter of the year has most of the inflation while the last quarter of the year is generally flat to deflationary. As a matter of fact, in the months since January 1954 there have been 17 negative months in January through June months and 58 negative months in the July through December months. So it appears that the majority of inflation occurs in the first half of the year and then moderates for the second half. One possible explanation is that during the fourth quarter many stores hold massive sales (think Black Friday) to reduce inventory before year-end for tax reasons.
If we look at only October, November and December, since 2000, there have been 11 deflationary 4th quarters and only 3 inflationary 4th quarters. Which is fairly amazing since the overall trend has been inflationary. In 2008 the fourth quarter was -3.91%. Which was exceptional due to the liquidity implosion but even though 2006 was a boom year it still had a negative fourth quarter of -0.54%. The average for the all 4th quarters since 2000 was a deflationary -0.57%.
Inflation and Unemployment
Both high inflation and high unemployment tend to make life rough for families trying to make ends meet. Back in the 1960’s economist Arthur Okun found a quick and dirty way to measure the pain caused by these two factors. He simply added their percentages and called it the “Misery Index”. For more information see Misery Index.
The History of Quantitative Easing
On June 20th 2012 the Federal Reserve decided that the recovery was stalling and so they voted to expand its “Operation Twist” program by swapping $267 billion in U.S Treasury securities by the end of 2012. Previously, “Operation Twist” was set to end in June. And then on September 13th, In an 11–1 vote the FED decided that QE3 was necessary and they decided to launch a new $40 billion per month, open-ended bond purchasing program of agency mortgage-backed securities. According to NASDAQ.com, this is effectively a stimulus program that allows the Federal Reserve to relieve $40 billion per month of commercial housing market debt risk. On 12 December 2012, the FOMC announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month.
On 19 June 2013, Ben Bernanke announced a “tapering” of some of the Fed’s QE policies contingent upon continued positive economic data. Specifically, he said that the Fed could scale back its bond purchases from $85 billion to $65 billion a month during the upcoming September 2013 policy meeting. But due to the poor economy, at it’s September 2013 meeting, the Fed decided to hold off on scaling back its bond-buying program. But between then and March 2014 the FED has tapered purchases down to $55 billion per month in three $10 billion cuts. At the March FED meeting they decided to cut mortgage bond purchases to $25 billion from $30 billion and Treasury purchases from $35 billion to $30 billion a month. Tapering continued down to zero in October 2014 at which point the FED began discussing raising interest rates.
According to CNBC’s Robert Frank, a Bank of England report shows that its quantitative easing policies had benefited mainly the wealthy, and that 40% of those gains went to the richest 5% of British households. Dhaval Joshi of BCA Research wrote that “QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it”. Anthony Randazzo of the Reason Foundation wrote that QE “is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality”.
Historical Inflation (2015) and the MIP Results
In 2015 we projected the potential for deflation for the first five months of 2015 and that is exactly what we got… very slight deflation at -0.09%, -0.03%, -0.07%, -0.20% and -0.04% for January through May.
June however registered actual inflation the first time all year with a minuscule 0.12%. In July annual inflation ticked up to 0.17% That means that something that cost $100 a year earlier would cost $100.17. That is compared to the typical inflation of around 3% which would mean that something that cost $100 last year would cost $103 this year.
In our January 2015 projection (based on December data) we published the following chart. It gave a most likely projection for November 2015 of 0.78% and a “Likely Low” of 0.44% and 11 months later the actual result was 0.50%. So if it hadn’t been for an unusual move down for the month of September we would have been right on target.
Click for larger Image
Inflation (2016) and the MIP Results
Back in October of 2015, a full year ago, the MIP was projecting a rather improbable looking chart with a very narrow band jumping up rather sharply over the next few months. Interestingly, when we added the reality line twelve months later the projection was very close.
Actual monthly and annual inflation for 2016:
For further information see the Current Commentary on the Annual Inflation Chart.
Being a mathematical inflation forecast, the MIP has no way to factor in things like Gas prices, monetary expansion, actions by China, natural disasters, Stock market crashes, etc. until it starts showing up in the current numbers, so we must be alert for these type of events.
Remember, it takes 1 to 2 years for monetary stimulus to result in inflation, depending on the money multiplier and other factors. See Velocity of Money and Money Multiplier – Why Deflation is Possible for more info.
Is there a correlation between inflation and the stock market ? This chart compares decade inflation and stock market returns during the decade.
Tim McMahon, Editor
Financial Trend Forecaster
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