Friday, October 3, 2014

What the Bond Market Sees: CPI Less Food & Energy

The following chart shows the consumer price index less food and energy since 1980 (in black).

Click to enlarge.

I have added two trend lines for your consideration. The first, in blue, attempts to fit an exponential growth curve to the data. The second, in red, attempts to fit a parabolic growth curve to the data.

Note that the parabolic growth curve fits the data 45 times better than the exponential growth curve (as seen in the difference in r-squared values). Also note that you can barely even see the raw data (in black) underneath the parabolic growth curve (in red) because the trend fits it so well.

The next chart shows what would happen if the parabolic trend continues.

Click to enlarge.

Perhaps we all better start learning Japanese for the long-term and perhaps the hyperinflationists should rethink their debt-based theories? Even ZIRP couldn't dislodge us from the parabolic trend.

I am not trying to suggest that the parabolic trend can last forever. It will fail someday. This is a mathematical certainty. That said, you can pry the long-term treasury bonds (cowardly TIPS and I-Bonds mostly) from my cold dead fingers. It is my opinion/concern that this trend could be with us for many, many more years. I'm 50 years old and mortal.

May we live in interesting interest-free times. Sigh.

This is not investment advice.

Source Data:
St. Louis Fed: Consumer Price Index for All Urban Consumers: All Items Less Food & Energy


jeff said...

Take a look at Japan CPI which follows your parabolic prediction who are 15 or so years ahead of us in the debt deflation.

Jazzbumpa said...

Here's Mish, looking at it from a different angle, reaching pretty much the same conclusion.


Anonymous said...

0.999 correlation in a 'natural world' dataset - unbelievable!! How could this possibly occur with the variation in money supply, money velocity, recessions, booms, pumping, etc. It's almost like it's irrelevant what the Fed does.

Stagflationary Mark said...


Yeah, Japan's CPI has fascinated me for decades. I've also had naming remorse over the last 5 years or so.

Stagflationary Mark started off okay in 2004, but I came to realize that Stagnationary Mark would have been a much better choice!

As a side note, I owned precious metals from 2004 to 2006. Treated me well. Those who bought $45 silver and $1800 gold though? Not so much.

Stagflationary Mark said...


CNBC assures us that long-term interest rates can only go up over the long term from here though! Good luck on that theory!

Stagflationary Mark said...


For what it is worth, nature is a fan of parabolas. A ball in flight nearly perfectly follows one. Only air resistance stops the perfection, but for a dense ball at relatively slow speeds, air resistance is negligible.

It's like inflation was hit with a bat in the 1970s and gravity has been acting on it ever since.