Inflation has been trending downwards for decades. We think the following factors have created this long-term trend:
- an aging population that buys less
- wage competition from third-world countries, due to globalization.
With talk of border taxes and rolling back globalization (at least partially), can we assume that the downward inflation trend will continue from here? We don’t know, but we intend to track the numbers. This post reviews a wide range of market-based and statistically derived measures of inflation.
Recent indicators suggest some softening of inflation.
Our takeaway: the annual rate of inflation is probably 1.5%-2.5%.
Consumer Price Index (CPI) – changes
The CPI is calculated by the government. More than a few investors view the index with a degree of skepticism.
Median CPI: +2.08%
Core CPI: +1.71%
PCE deflator: +1.46%
GDP deflator: +1.25%
Sticky CPI: +2.14%
Trimmed Mean PCE: +1.25%
Producer Price Index (PPI) – changes
The PPI is calculated by the government. Some investors regard it with suspicion:
Finished Goods: +2.34%
Wages are very important because they account for such a large portion of the cost of goods and services.
Average hourly earnings: +2.46%
An increase in average hourly earnings does not translate into an equal amount of inflation. Increases in productivity can offset (entirely or partially) the inflationary effect of higher wages.
Billion Prices Project
The billion prices project estimates the annual rate of inflation by using prices posted by online merchants.
As of the last publicly available data point, BPP estimates the U.S. inflation rate at annualized rate of about +0%.
Purchasing Manager’s Index
The Institute for Supply Management publishes the results of a monthly survey of their members, including a price diffusion index. A diffusion index doesn’t tell us the rate of inflation, but rather what percentage of the survey respondents are seeing prices go up or down.
The survey results suggest no significant inflationary pressures.
Manufacturing Prices: 62.0
Services Prices: 55.7
Treasury Inflation Protected Securities
In addition to ordinary bonds, the U.S. Treasury issues inflation-protected securities (TIPS). By comparing the yields, one can infer the inflation forecast of the capital markets.
Ordinarily one should assign high credibility to this type of information. However, caution may be appropriate given extensive central bank manipulation of the credit markets.
Five Year Forecast: +1.56% per annum (5Y Treasury Yield – 5Y TIPS Yield)
Ten Year Forecast: +1.75% per annum (10Y Treasury Yield – 10Y TIPS Yield)
5-Year, 5-Year Forward Inflation Expectation Rate
Inflation expected from 5 years from now to 10 years from now: +1.94%
Michigan Consumer Sentiment
1-Year Expected Rate of Inflation: +2.6
5-Year Expected Rate of Inflation: +2.6
ECRI U.S. Future Inflation Gauge
Crude Oil: Downtrend = deflationary pressure
Copper: Uptrend = inflationary pressure
U.S. Dollar: Downtrend = inflationary pressure