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May CPI: 215.132
Percent Change: 0.64985%
We didn't quite make it to 0.7%. How lucky is that?
The following chart shows the average inflation rate over the previous five years. It continues to creep up.
Here's a closer look at recent years. The red trend line is a 4th order polynomial. It simply represents what my eye seems to see. That doesn't mean my eye is necessarily right though. It is possible the deflationists will be right when we least expect it. I'm not betting on it, but wouldn't rule it out either.
What inflation rate is the Fed targeting long-term? It seems their archery skills need improvement. They keep hitting well below the bull's eye. Perhaps that explains the optimism of the bulls.
Consistency
How much longer before inflation expectations become unanchored?
Fear
Or is this accelerating trend higher something we will all embrace? We do seem to love our tax rebate checks anyway. In theory, the deflationists will no doubt be right someday though, maybe even next week. Who knows? Prechter's Conquer the Crash ("deflationary depression") book is also about five years old. Here's a quote from the book. "You can get rich being short commodity futures in a deflationary crash." Thank goodness I didn't brace for deflation all those years. It would have financially ruined me. Fortunately, I also read Bernanke's 2002 deflation speech. A special thanks to Bernanke for explaining our helicopter economy to me.
Although TIPS have been underloved (sold off) in recent months, I can say they earned ~0.64985% in May plus a real yield in addition to that. As I'm planning to hold until maturity I can hardly complain. It sure beats burying cash in the backyard while hoping for the deflation that may or may not come.
The 0.64985% number is seasonally adjusted. TIPS are tied to the unadjusted number which is up 0.84209% (a headline number which also benefited from rounding). TIPS therefore actually did a bit better. That being said, the seasonally adjusted number is still more indicative of the true short-term rate though. No matter how you look at it though, TIPS did offer some decent inflation protection in May (unlike three-month treasury bills for instance).
See Also:
Trend Line Disclaimer
Source Data:
St. Louis Fed: Consumer Price Indexes
3 comments:
Bonus Trivia
Had May's 215.132 reading been 215.133 insted we'd have made it to a rounded 0.7%. That's how lucky it was!
That's just one part per two hundred thousand.
If you were to slip that much extra toxic garbage into a barrel of fine wine few would probably even notice. I point you to today's market euphoria as confirmation of my theory.
I think you should hedge your bets more ;) I am on the deflationist side, because at some point, people won't be able to buy anything. I was thinking about my life these days and what I could possibly compare it to. The first thought was Okies during the Dust Bowl (although I'm not rambling on just yet.) The other was back when I used to be young and foolish, working seasonal jobs and getting food stamps when laid off. Only now I have to pay for gas to drive to work for the same thing. Making the food stretch to the end of the month is very similar though.
Teri,
For what it is worth, people can't buy much in Zimbabwe. There's 85% unemployment so people have little income. Inflation is running at 730,000%.
Economy of Zimbabwe
http://en.wikipedia.org/wiki/Economy_of_Zimbabwe
In recent years, poor management of the economy and political turmoil has led to considerable economic hardship.
I see three scenarios.
Deflation
Prices drop. Unemployment rises. The Fed can drop more money out of helicopters to fix it.
Inflation
Prices rise. Unemployment falls. The Fed can suck money back into the helicopters to fix it.
Stagflation
Prices rise. Unemployment rises. The Fed is boxed.
Perhaps I'm too pessimistic, but I have chosen the option that can't be fixed by the Fed. One might even argue I'm partially blaming the Fed for where we are now, although the blame really should be spread out amongst all of us, myself included.
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