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. 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 Prediction for 2014
Click for larger Image
Last month our prediction for inflation for October turned out right on the nose. We said annual inflation would range from 1.62% to 1.72% with the actual inflation rate turning out to be dead in the middle at 1.66%. This month’s MIP is projecting that Annual inflation will be flat for November (although monthly prices will be down) with a downward bias through June 2015.
So Far in 2014
January through May of this year saw monthly inflation between 0.33% and 0.37% except for March which was very high at 0.64% which would annualize at 7.68%. June came in at a moderate 0.19% but monthly inflation for July and August was actually a deflationary -0.04% and -0.17% respectively. It is not unusual to have deflationary months in the 4th quarter but it is unusual for the deflation to hit so early. If the trend continues and the 4th quarter continues it’s deflationary tendencies we could see some deflation scares before long.
Generally, toward the end of the year we see disinflation in the last quarter, which means monthly deflation but on an annual basis inflation is still positive. This could knock the inflation rate much lower if it follows the normal trend. Generally, most of the inflation for the year is contained in the first three or four months of the year with the rest of the year moderate or even negative.
Some factors in October 2014’s monthly inflation rate were fruits and vegetables which rose 0.9%, on a seasonally adjusted basis for the month Energy fell -1.9%, Fuel Oil fell -4.0%, electricity rose 0.5% and Gasoline fell -3.0% on a monthly basis while Natural gas fell -2.7% and Airfares rose 2.4%.
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.
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 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.
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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