Updated November 17, 2015
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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Inflation Predictions for 2015
We’ve been projecting the potential for deflation for a while and so far the first five months of 2015 have been exactly that. Although so far it has been very slight 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 ago would cost $100.17 today. 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 projection (based on December data) we projected that inflation would drop from around 3/4% to Zero or below for the 12 month period ending in January 2015 and that is precisely what happened. We hit the nail right on the head as inflation (or should I say deflation) came in at -0.09%. (Here is the chart with the reality line added).
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You can see that we were also right on target for February with the “Most likely” point virtually identical to what actually happened. March didn’t turn out quite as deflationary as we had projected but what actually happened was still well within the projection. April once again hit the “Most Likely” line right on the nose (four months in advance!) Our May projection came in between the “most likely and the “likely high”. Our June projection was a bit on the low side so it appears that inflation is picking up a bit sooner than projected. Our July projection came in almost precisely on the likely high line while August came in slightly below the most likely line. Not bad eight months in advance. Now let’s see what our current projections say…
October’s monthly inflation rate was -0.04% the same as the entire annual inflation rate September 2014- September 2015 but because -0.25% fell out of the calculation Annual Inflation rose to 0.17% for the 12 months ending in October 2015. This is very close to August’s 0.20%. The interesting thing in this chart is the massive up-move through January and then the flattening afterward. The major vertical rise calculated for January 2016 is the result of January 2015’s monthly numbers being negative when typically they are strongly positive. So if this January is typical a negative number will fall out of the calculation and be replaced by a highly positive one thus giving us a strong increase in the annual inflation rate. However, if January is less positive (or zero) that major vertical rise will shrink. However, it would have to be -0.47% for the rise to disappear altogether, which is highly unlikely. Monthly inflation for November and December are also very negative so if they are replaced by less negative numbers that will also account for the annual inflation rate increase over the next two months.
Click Chart for Larger Image
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 17 negative months in January through June months and 57 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%.
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”.
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, four months in 2013, five months in 2014 and in the typically inflationary January – May period of 2015.
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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