What is the Moore Inflation Predictor©?

Febrary 17, 2012

The Moore Inflation Predictor© (MIP) is a highly accurate graphical representation designed to forecast the inflation rate. It has a 97%+ accuracy rate on forecasting inflation rate direction & turning points. And over 90% of the time the inflation rate falls within the projected “likely” range and 7% of the time it falls within the “possible” range.

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.

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 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.

You would think projecting 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 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.

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 2012

Current Inflation Forecast

The year 2011 started with five months in a row of extremely high monthly inflation. In the chart we can see the blue line climbing at a 45 degree angle from below 2% to above 3.5% and then flattening out to peak just below 4%.   June was negative and July was small. August and September inched the annual inflation rate up to 3.87%. But October, November and December were negative on a monthly basis  driving the Annual Inflation rate back down to 2.96%. This led last month’s MIP to project a possible decline back into deflationary territory. With what we know about the effects of QE2 this was highly unlikely so last month I presented an alternate MIP which turned out to be much closer to what we are seeing this month (See: standard MIP chart above) as January 2012 once again had high monthly inflation rates very comparable to January 2011.

We still have the months through May where high numbers will continue to fall out of the inflation rate and so as they do, unless they are replaced by equally high numbers the annual inflation rate will fall. Which is why the MIP is indicating the inflation rate will decline through May.  But the effects of QE2 have not been felt yet, so that may boost inflationary pressures and may be beginning to kick in already as January’s monthly inflation was 0.44%. We had originally been expecting it to begin kicking in around May 2012. We did say, ”Perhaps it is the calm before the storm.” It is now possible that the storm will begin a bit earlier than predicted. We have said in other places that it may have taken QE1 longer to kick in because we were in the throes of Deflation at the time. This time the effects may be quicker to take hold.

Unfortunately, the MIP is not designed to take monetary stimulus into consideration. So last month I developed an alternate MIP to try to take the possibility into account using some data from QE1.

The following modified MIP chart attempts to estimate the effects of the increased monetary stimulus from QE2 starting around May 2012. Notice that the extreme low is above 1.25% in May and the extreme high in November 2012 exceeds 5% instead of 4% in the standard projection.

In many respects I believe this is a much more realistic projection unless something goes very wrong with Europe or the Stock Market. Unfortuantely, it does open the possibility of high inflation down the road. Anything over 5% causes the economy extreme stress as we saw  in July – August 2008.

Will there be a QE3?

Dallas Fed President Richard Fisher told reporters after a speech Wednesday:

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.

Which is pretty much what the MIP is telling us as well.

For further information see the Current Commentary on the Annual Inflation Chart.

Terry Coxon believes that the only reason we haven’t already seen massive inflation from QE1 is that the government is paying the banks to keep the money out of circulation. See The Long Road to Inflation Perdition

Note:

Being a mathmatical 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

Disclaimer:

At Financial Trend Forecaster we are not registered investment advisors 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.

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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!

Yes, Notify Me when the new inflation forecast chart comes out!