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.
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.
Don’t miss next month’s MIP Inflation Forecast!
Sign up for our Free E-zine and we will notify you when the new Charts are released!
Current Inflation Prediction for 2014
Last month we predicted a slight decrease in inflation for August but instead we got a 14.5% reduction as inflation fell from 1.99% in July to 1.70% in August. The MIP had projected a maximum low of 1.81%. This month’s MIP is projecting that inflation will be down slightly for September with a flat to upward bias through the year end but since the 4th quarter is often deflationary we will see greater declines than projected unless the deflationary forces came early this year. The median is projecting a possible slight decrease from current levels with 1.66% inflation rate by November but a deflationary 4th quarter like last year could drive inflation down to 1% by year end.
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 0.19% and monthly inflation for July was actually a deflationary -0.04%. Three months ago I said, “we are nearing the end of the high inflation period and entering the moderate time of the year” and so June was right on track being much lower than previous months. July was lower than normal and August was also deflationary plus we are still expecting a deflationary period toward the end of the year (on a monthly basis) resulting in a disinflationary last quarter on an annual basis. So unless we got a couple of inflation spikes inflation could be nearing 1% by year end.
The major factors in August’s 2014’s monthly inflation rate were fruits and vegetables which fell -0.8%, Energy fell -2.7% electricity fell -0.4% on a monthly basis but Gasoline fell a whopping -4.1% on a monthly basis while Apparel rose 0.9% and Airfares fell -6.2%.
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
At Financial Trend Forecaster we are not registered investment advisers and do not provide any individualized advice. Past performance is not necessarily indicative of future performance and future accuracy and profitable results cannot be guaranteed.
Note: We provide links to some of our favorite commentary and although we don’t always agree with them it is always insightful and therefore we believe it is beneficial information to share. Sometimes these partners will offer you free trials or other valuable bonuses. In some cases we may receive a commission if you use our links to their site. We assume you will use this information wisely and determine its benefit based on your own circumstances. We do not know your situation but hope you will find the information useful in making your own informed decisions.
Don’t miss next month’s MIP Inflation Forecast!
Sign up for our Free Monthly E-zine and we will notify you when the new Charts are released!