Using the Moore Inflation Predictor©
By Tim McMahon
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 has done 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. Even though there was a sharp drop in the inflation rate the MIP did a good job of forecasting it, as the actual (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.
And finally 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.
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 Prediction for 2014
Monthly inflation was very high in January at 0.37% for the month which if annualized would result in an annual inflation rate of 4.44%. Last month’s MIP predicted that the inflation rate would be flat to slightly down but instead inflation was slightly up. So the first quarter of 2014 has begun with strong inflation as it typically does. Likewise the 4th quarter of last year was quite typical with deflationary forces driving prices down from September through December.
The major factors in January 2014′s monthly inflation rate were Fuel Oil prices which were up 3.7% for the month, Apparel which was down -1.7% for the month and Airfares which were down -3.2% for the month.
We have been tracking the seasonality aspects of inflation and have noted some fairly consistent 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 13 negative months in January through June months and 46 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 2001, there have been 10 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 2001 was a deflationary -0.57%.
Back in May 2012 we began incorporating this seasonality factor into the MIP. Up until then the MIP has used annual metrics to create its projections but this left it susceptible to the seasonal changes.
For more information see Misery Index.
Previously, Dallas Fed President Richard Fisher told reporters :
There will be no QE3. I will support no QE3, no additional mortgage-backed securities, no additional Treasuries. Wall Street keeps dangling QE3 out there – I think it’s a fantasy of Wall Street – it’s not going to happen, it’s not necessary.
But then 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. This has boosted the stock market uncharacteristicly in mid-summer (and may have goosed the inflation rate as well). But was it enough to top previous highs in inflation adjusted terms. See Inflation Adjusted Stock Prices.
And then on September 13th, the FED announced that QE3 is necessary and they will be trying once again to reinflate the economy.
Now the FED is expected to buy $600 Billion in Treasuries according to a Reuters poll of 43 economists.
The necessity of additional stimulus lends credence to Robert Prechter’s predictions of increased deflationary pressures, as does the prevalence of deflationary 4th quarters and the monthly deflation in six months of 2012.
Do you know the arguments for Deflation? Do you know how to prepare and protect your savings if it does? If not… Download Your Free Deflation eBook from Robert Prechter Here.
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 the massive monetary expansion, actions by China to remove “reserve status” from the U.S. dollar, 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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