Aug 13, 2010

The Moore Inflation Predictor© (MIP) is a highly accurate graphical representation forecasting the future direction of 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.

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.

To see how well the MIP has done in predicting inflation see some previous MIP inflation forecasts with a reality line added.

Note:  Recently we added a blue shaded (under water) region to the MIP to indicate deflation. 

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Current Inflation Prediction for 2010

Current Inflation Forecast

Inflation fell from 2.63% in January to 1.05% in June. The inflation rate for July (released by the U.S. Bureau of Labor Statistics in August) was 1.24% although they round it to 1.2%.

Back in February with the monthly inflation rate at 0.02% or virtually non-existant I added the -0.07% deflationary scenario even though at the time everyone (except Prechter) was saying prolonged deflation was impossible.  As you can see from the chart above our projections are getting closer and closer to the "impossible" deflationary scenario.

So far we haven't seen the maximum deflationary trajectory but the actual inflation rate has been on the low side of our ordinary MIP projections.

Below you can see  the MIP chart I created in April 2010 (with March inflation data).  I've added the actual numbers (in Blue) since then and you can see that we have consistently fallen on the low side almost exactly tracking the "Likely Low" or "Etreme Low" line. By comparing this chart with the current chart above you can see that the projections are tilting more toward the not so "impossible"deflationary scenario I laid out back in April. Way back in April everyone was convinced that the Trillion dollar stimulus would cause hyperinflation. But my article  Velocity of Money and Money Multiplier - Why Deflation is Possible showed another possibility.

 

Click for Larger Image of MIP with actual results.

Back in April I said, "With the addition of the deflationary scenario we can see what would happen if we see a monthly average of -0.07% deflation over the next year. This is a fairly small monthly deflation rate. December 2009 had a
-0.18% deflation while July 2009 had a -0.16%  monthly deflation"

Since then June 2010 had -0.10%. When the stock market was crashing in 2008 monthly deflation rates were as low as  -1.92%. 

With a 0.22% monthly inflation rate falling out of the the equation for August 2010 it is possible that we could be back around 1% annual inflation, if the monthly inflation rate comes in at -0.02%.

For more info about a deflationary scenario see:

8 Technical Indicators Point Down from Here

Note:

Being a mathmatical projection, 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 at least 2 years for monetary stimulus to result in inflation, depending on the money multiplier and other factors, so we could still see massive inflation just beyond the MIP's current window. See  Velocity of Money and Money Multiplier - Why Deflation is Possible for more info.

Robert Prechter of the Elliotwave Theorist is forecasting deflation in spite of government actions to the contrary. To read his excellent arguments on why the government can't stop Deflation even with massive increases in the money supply Click Here.

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.

Note: We are a  compensated affiliate of Elliottwave International and Casey research, meaning we may receive a commission if you use our links to their site.

 

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!

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