How Not to View Current Inflation

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
SimpleGift
Posts: 3913
Joined: Tue Feb 08, 2011 3:45 pm

How Not to View Current Inflation

Post by SimpleGift »

There's been quite a few articles in the financial press in recent weeks breathlessly announcing that "annual inflation is running at nearly 5%!" After all, in more normal times, when inflation is generally stable and increases are modest, the monthly "year-over-year inflation rate" has been a meaningful measure of trend inflation, one we've perhaps gotten used to.

However, since January 2020, with all the wild swings in the monthly inflation rate — from deeply negative in the depths of the pandemic to sharply higher so far in the recovery (chart below) — the monthly year-over-year inflation rate has been a mostly meaningless metric and nearly devoid of any useful information for the investor.
  • Image
    Data source: Consumer Price Index from FRED
In fact, the monthly year-over-year rates have served to deflect attention away from the average trend inflation rate of about 3.0% from January 2020 to May of 2021 (dotted line, chart below):
  • Image
    NOTE: Chart edited to show corrected trend inflation of 3.0%, not 2.4%.
    Data source: Consumer Price Index from FRED
In the months ahead, we are almost guaranteed to see more sensational articles touting high year-over-year inflation rates, perhaps even above 5%. However, the smart investor will ignore these monthly announcements and will keep her eye on the average trend inflation rate measured over the span of a year or two — a trend inflation rate which the bond markets are currently expecting to be in the 2.5%-3% range in the years ahead. Forewarned is forearmed!
Last edited by SimpleGift on Fri Jun 11, 2021 3:53 am, edited 4 times in total.
Thesaints
Posts: 4112
Joined: Tue Jun 20, 2017 12:25 am

Re: How Not to View Current Inflation

Post by Thesaints »

While I agree that these last two months data does not make a trend and we should at least wait to see higher inflation reflected in the "less food & energy" numbers, I can't say I understand your plot.
The most recent CPI-U number on January 1st, 2020 was the December 2019 level at 256.974. May 2021 is 269.195. That makes an annualized inflation rate of 3.33%. Can't understand where 2.4% comes from and it looks understated.
User avatar
Topic Author
SimpleGift
Posts: 3913
Joined: Tue Feb 08, 2011 3:45 pm

Re: How Not to View Current Inflation

Post by SimpleGift »

Thesaints wrote: Thu Jun 10, 2021 8:40 pm That makes an annualized inflation rate of 3.33%. Can't understand where 2.4% comes from and it looks understated.
The 2.4% is not an annualized number, it's simply the trend inflation rate from January 2020 to May 2021, as stated in the OP.

The point is to smooth out the effects of the pandemic — last spring’s price declines, the increases as economic activity has recovered, and the recent jumps that are reflecting a combination of reopening, supply bottlenecks and rising input costs.
User avatar
nedsaid
Posts: 14766
Joined: Fri Nov 23, 2012 12:33 pm

Re: How Not to View Current Inflation

Post by nedsaid »

My view is that a lot of this inflation we have seen in April and May is transitory. I also understand that we actually saw a bit of deflation at this time last year so we have to keep that in mind. Still I have concerns, particularly with all of the stimulus we are seeing from both a fiscal and a monetary standpoint. Keeping my fingers crossed but I am a bit worried.
A fool and his money are good for business.
000
Posts: 4952
Joined: Thu Jul 23, 2020 12:04 am

Re: How Not to View Current Inflation

Post by 000 »

Now you're telling us:
SimpleGift wrote: Thu Jun 10, 2021 8:30 pm In the months ahead, we are almost guaranteed to see more sensational articles touting high year-over-year inflation rates, perhaps even above 5%. However, the smart investor will ignore these monthly announcements and will keep her eye on the average trend inflation rate measured over the span of a year or two — a trend inflation rate which the bond markets are currently expecting to be in the 2.5%-3% range in the years ahead. Forewarned is forearmed!
SimpleGift wrote: Tue Jun 01, 2021 11:56 am A year ago, the bond markets were forecasting a very low inflation future, with 2-year inflation below 0.5% and 10-year inflation at 1.2% (in orange above). Today, 2-year inflation is forecast at 3%, with 10-year inflation at 2.5% (in blue).

In sum, with all the current talk of higher inflation on the horizon, the bond markets don't seem terribly worried. An average inflation rate of 2.5% long term is probably something most investors (and the Federal Reserve) can live with.
SimpleGift wrote: Fri May 28, 2021 3:21 pm So what does this recent history portend for future inflation? Due to the economic dislocations of the pandemic, short-term inflation expectations are clearly rising today, perhaps to the 4%-5% range into 2022. However, the persistent, long-term disinflationary trends that brought us today's low inflation environment will not be going away. Central banks worldwide will still be maintaining their formal inflation targets, the forces of global competition will still be at work, new technologies will still be advancing, and falling birth rates with rapidly aging populations will still be the norm in most of the developed world.

Bottom line: While every portfolio design should consider and anticipate the impacts of inflation, one need not go overboard. Even if somewhat higher expected inflation does persist after the pandemic recovery, in my view there's no chance of the U.S. returning to the runaway inflation rates of the 1970s — we simply live in different world now.
That's a lot of certainty about how worldwide societies and economies will work!

But from last year:
SimpleGift wrote: Thu Apr 30, 2020 12:34 pm At these low rates of expected inflation, it's likely that the Fed and other central banks around the world will not come close to meeting their 2% inflation targets in the coming decade. It's also increasingly possible that long-term inflation expectations in the developed world might permanently reset lower, into the 0.5%-1.0% range.
SimpleGift wrote: Fri Apr 10, 2020 12:50 am Clearly, the bond market and professional investors (with their money on the line) are not expecting high inflation in the wake of the virus crisis. In fact, market expectations are for deflation into 2022, then inflation below 1% out to 2028, with inflation below 1.5% out to the year 2050. Market expectations may prove wrong, but they're the best we have right now.
Personally I am an inflation bull and think it's the trade of the decade.
KlangFool
Posts: 20992
Joined: Sat Oct 11, 2008 12:35 pm

Re: How Not to View Current Inflation

Post by KlangFool »

OP,

Why should I care? I am prepared. I do not assume whether we are heading towards inflation, deflation, or whatever.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
protagonist
Posts: 7147
Joined: Sun Dec 26, 2010 12:47 pm

Re: How Not to View Current Inflation

Post by protagonist »

Housing prices have been going through the roof in many markets.
And gas prices are hovering close to $3/gal. now, both in New England and in Florida.
Used cars are probably at an all-time high as well....I don't know about new ones.
It's quite bizarre.

This is the first time I recall it being really difficult (if not impossible) to pick a safe investment that will keep up with inflation, other than I-bonds, or I suppose TIPS or EE bonds if you are willing to hold them for a very long time.
Last edited by protagonist on Thu Jun 10, 2021 9:54 pm, edited 1 time in total.
User avatar
ray.james
Posts: 1498
Joined: Tue Jul 19, 2011 4:08 am

Re: How Not to View Current Inflation

Post by ray.james »

This reminds me of this thread last year

". G.D.P. fell at a rate of 32.9 percent." Misleading headlines sells more.

viewtopic.php?f=10&t=321560
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
User avatar
Topic Author
SimpleGift
Posts: 3913
Joined: Tue Feb 08, 2011 3:45 pm

Re: How Not to View Current Inflation

Post by SimpleGift »

000 wrote: Thu Jun 10, 2021 9:42 pm Personally I am an inflation bull and think it's the trade of the decade.
Ha, differences of opinion are what make efficient markets — and interesting Forum discussion topics. :wink:
CuriousTacos
Posts: 102
Joined: Thu Apr 12, 2018 3:31 pm

Re: How Not to View Current Inflation

Post by CuriousTacos »

SimpleGift wrote: Thu Jun 10, 2021 8:30 pm In fact, the monthly year-over-year rates have served to deflect attention away from the average trend inflation rate of about 2.4% from January 2020 to May of 2021 (dotted line, chart below):
  • Image
    Data source: Consumer Price Index from FRED
In the months ahead, we are almost guaranteed to see more sensational articles touting high year-over-year inflation rates, perhaps even above 5%. However, the smart investor will ignore these monthly announcements and will keep her eye on the average trend inflation rate measured over the span of a year or two — a trend inflation rate which the bond markets are currently expecting to be in the 2.5%-3% range in the years ahead. Forewarned is forearmed!

I agree that many news headlines exaggerate things. And I know you acknowledge that the recent trend of about 2.5% YoY is higher than the roughly 1.5% in recent years. But I think your plot deceptively makes it look like prices have merely returned to trendline of recent years. Showing a few years like the following is more complete in my opinion:
Image

What happens next is obviously unknown.
User avatar
Clever_Username
Posts: 1830
Joined: Sun Jul 15, 2012 12:24 am
Location: Southern California

Re: How Not to View Current Inflation

Post by Clever_Username »

I think inflation was one of the first financial topics where I realized that there was a ton of sensationalism in the reporting.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
User avatar
iceport
Posts: 4888
Joined: Sat Apr 07, 2007 4:29 pm

Re: How Not to View Current Inflation

Post by iceport »

CuriousTacos wrote: Thu Jun 10, 2021 10:08 pm Showing a few years like the following is more complete in my opinion:
Image

What happens next is obviously unknown.
Very helpful perspective. Thanks!
"Discipline matters more than allocation.” ─William Bernstein
TimTheEnchanter
Posts: 7
Joined: Fri Jul 12, 2019 12:54 am
Location: California

Re: How Not to View Current Inflation

Post by TimTheEnchanter »

Basic logic implies that when the money supply gets to this level inflation is unavoidable. The fed is between the rock and the hard place. The fed keeps buying AAA apple paper etc, just to pump money but when it stops and eventually it will have to, watch out...current rates are artificially low because of the fed's action.
"Neither a borrower nor a lender be. Do not forget, stay out of debt..." Shakespeare
Northern Flicker
Posts: 7817
Joined: Fri Apr 10, 2015 12:29 am

Re: How Not to View Current Inflation

Post by Northern Flicker »

SimpleGift wrote: Thu Jun 10, 2021 8:46 pm
Thesaints wrote: Thu Jun 10, 2021 8:40 pm That makes an annualized inflation rate of 3.33%. Can't understand where 2.4% comes from and it looks understated.
The 2.4% is not an annualized number, it's simply the trend inflation rate from January 2020 to May 2021, as stated in the OP.

The point is to smooth out the effects of the pandemic — last spring’s price declines, the increases as economic activity has recovered, and the recent jumps that are reflecting a combination of reopening, supply bottlenecks and rising input costs.
The bond market agrees with you. TIPS breakevens usually overstate inflation by a little bit. The 5-yr breakeven is at 2.48% at today's close. That probably translates to market expectations for 5-yr inflation a little below 2.4%.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Northern Flicker
Posts: 7817
Joined: Fri Apr 10, 2015 12:29 am

Re: How Not to View Current Inflation

Post by Northern Flicker »

TimTheEnchanter wrote: Thu Jun 10, 2021 10:22 pm Basic logic implies that when the money supply gets to this level inflation is unavoidable. The fed is between the rock and the hard place. The fed keeps buying AAA apple paper etc, just to pump money but when it stops and eventually it will have to, watch out...current rates are artificially low because of the fed's action.
When the Fed rate is very low, the Fed has more than typical inflation fighting ability, not less. The same goes for a larger than average balance sheet.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
User avatar
HomerJ
Posts: 16721
Joined: Fri Jun 06, 2008 12:50 pm

Re: How Not to View Current Inflation

Post by HomerJ »

The year-to-year inflation rate of 5% is meaningless.

One year ago, we were deep in the pandemic. Airline and hotel prices were way down, and are much higher today compared to one year ago.

Right now, supply and demand is way out of whack.

Let everything settle down over the next year and we'll see what's real.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
phantom0308
Posts: 312
Joined: Thu Aug 25, 2016 6:52 pm
Location: Rochester Hills, MI

Re: How Not to View Current Inflation

Post by phantom0308 »

TimTheEnchanter wrote: Thu Jun 10, 2021 10:22 pm Basic logic implies that when the money supply gets to this level inflation is unavoidable. The fed is between the rock and the hard place. The fed keeps buying AAA apple paper etc, just to pump money but when it stops and eventually it will have to, watch out...current rates are artificially low because of the fed's action.
The money supply has been incredibly high for a very long time yet core CPI has been below 2% target nearly the entire time. The exact same argument has been made since QE started.
User avatar
Topic Author
SimpleGift
Posts: 3913
Joined: Tue Feb 08, 2011 3:45 pm

Re: How Not to View Current Inflation

Post by SimpleGift »

CuriousTacos wrote: Thu Jun 10, 2021 10:08 pm Showing a few years like the following is more complete in my opinion:

Image
Agree that adding a few more years to the CPI chart gives a more comprehensive perspective. Thanks for contributing this.

The point is we've had trend inflation around 1.5% for quite a few years. We now seem to be in a transition period, through and after the pandemic, where trend inflation is expected in the 2.5%-3.0% range in the years just ahead (according to current bond market breakeven rates) — but nothing like the "annual inflation running at 5%!" prospect mentioned in recent press articles.
Thesaints
Posts: 4112
Joined: Tue Jun 20, 2017 12:25 am

Re: How Not to View Current Inflation

Post by Thesaints »

SimpleGift wrote: Thu Jun 10, 2021 8:46 pm The 2.4% is not an annualized number, it's simply the trend inflation rate from January 2020 to May 2021, as stated in the OP.
How is it calculated ?
BJJ_GUY
Posts: 672
Joined: Wed Mar 13, 2019 7:45 am

Re: How Not to View Current Inflation

Post by BJJ_GUY »

SimpleGift wrote: Thu Jun 10, 2021 8:46 pm
Thesaints wrote: Thu Jun 10, 2021 8:40 pm That makes an annualized inflation rate of 3.33%. Can't understand where 2.4% comes from and it looks understated.
The 2.4% is not an annualized number, it's simply the trend inflation rate from January 2020 to May 2021, as stated in the OP.

The point is to smooth out the effects of the pandemic — last spring’s price declines, the increases as economic activity has recovered, and the recent jumps that are reflecting a combination of reopening, supply bottlenecks and rising input costs.
What is the trend inflation rate? If it's not an annualized number why is the rate lower than the annualized figure? Doesn't a 'rate' imply a unit of time, and if so, what is it?

This confuses me
User avatar
drumboy256
Posts: 126
Joined: Sat Jun 06, 2020 2:21 pm

Re: How Not to View Current Inflation

Post by drumboy256 »

I'm not personally worried about inflation. It's big mac economics at this point meaning companies are simply passing on supply chain costs to keep margins which in the traditional sense, has always happened, its not new. The current issue that people should be worried about is how the Fed and the ECB are devaluing dollars and euro's to maintain their QE policy of stimulating economies. However, to KlangFool's point above--- So what? Inflation, deflation, transitory, non-transitory, etc. are part of the game. If the whole thing is rigged, well then the only answer is to enjoy the ride and have perspective that you're not in control and at a minimum should have a plan. Spoiler alert, stay the course.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson
User avatar
Topic Author
SimpleGift
Posts: 3913
Joined: Tue Feb 08, 2011 3:45 pm

Re: How Not to View Current Inflation

Post by SimpleGift »

BJJ_GUY wrote: Thu Jun 10, 2021 11:52 pm What is the trend inflation rate? If it's not an annualized number why is the rate lower than the annualized figure? Doesn't a 'rate' imply a unit of time, and if so, what is it?
Thesaints wrote: Thu Jun 10, 2021 11:36 pmHow is it calculated ?
The methodology used in the OP is the same as that used by the Dallas Federal Reserve in this article from a month ago — however the OP analysis has different starting and ending points, so slightly different end results:
If interested, the Dallas Fed article has an Excel spreadsheet one can download to see the methodology in more detail. In fact, the trend rate in the OP is an annualized number, but reflects the rate of inflation increase over the 16-month period from January 2020 to May 2021 — i.e., from before the start of the pandemic to well into the recovery today.
Thesaints
Posts: 4112
Joined: Tue Jun 20, 2017 12:25 am

Re: How Not to View Current Inflation

Post by Thesaints »

SimpleGift wrote: Fri Jun 11, 2021 12:17 am
BJJ_GUY wrote: Thu Jun 10, 2021 11:52 pm What is the trend inflation rate? If it's not an annualized number why is the rate lower than the annualized figure? Doesn't a 'rate' imply a unit of time, and if so, what is it?
Thesaints wrote: Thu Jun 10, 2021 11:36 pmHow is it calculated ?
The methodology used in the OP is the same as that used by the Dallas Federal Reserve in this article from a month ago — however the OP analysis has different starting and ending points, so slightly different end results:
If interested, the Dallas Fed article has an Excel spreadsheet one can download to see the methodology in more detail. In fact, the trend rate in the OP is an annualized number, but reflects the rate of inflation increase over the 16-month period from January 2020 to May 2021 — i.e., from before the start of the pandemic to well into the recovery today.
They use some "Headline CPI" data which I don't recognize. Those are not the CPI-U number. Then re-normalize for 100 on a set date (why ?) and then draw a line between the first and the last point.
How would that be different from taking the CPI-U values at the beginning and at the end (thus ignoring all the intermediate values) and annualizing the change ?
In your plot case, in Jan 2020 the index was 257.971. In May it was 269.195. Their ratio, elevated to (12/16) makes 3.25% and that's the annualized value from January 2020 to today (i.e. May).
How do you get 2.4% ?
If you applied your method from May 2020 to May 2021, how much would you get ?
Thesaints
Posts: 4112
Joined: Tue Jun 20, 2017 12:25 am

Re: How Not to View Current Inflation

Post by Thesaints »

phantom0308 wrote: Thu Jun 10, 2021 11:08 pm
TimTheEnchanter wrote: Thu Jun 10, 2021 10:22 pm Basic logic implies that when the money supply gets to this level inflation is unavoidable. The fed is between the rock and the hard place. The fed keeps buying AAA apple paper etc, just to pump money but when it stops and eventually it will have to, watch out...current rates are artificially low because of the fed's action.
The money supply has been incredibly high for a very long time yet core CPI has been below 2% target nearly the entire time. The exact same argument has been made since QE started.
The key is "money supplied to whom ?"
CuriousTacos
Posts: 102
Joined: Thu Apr 12, 2018 3:31 pm

Re: How Not to View Current Inflation

Post by CuriousTacos »

Thesaints wrote: Fri Jun 11, 2021 1:07 am They use some "Headline CPI" data which I don't recognize. Those are not the CPI-U number. Then re-normalize for 100 on a set date (why ?) and then draw a line between the first and the last point.
How would that be different from taking the CPI-U values at the beginning and at the end (thus ignoring all the intermediate values) and annualizing the change ?
In your plot case, in Jan 2020 the index was 257.971. In May it was 269.195. Their ratio, elevated to (12/16) makes 3.25% and that's the annualized value from January 2020 to today (i.e. May).
How do you get 2.4% ?
If you applied your method from May 2020 to May 2021, how much would you get ?
Their calculation is based on seasonally adjusted data (which is easiest to get here) as follows:

Code: Select all

Feb 2020: 258.824
Apr 2021: 266.832
(266.832 / 258.824) ^ (12 / 14) - 1 = 2.6%
Doing this for May 2021 gives:

Code: Select all

Feb 2020: 258.824
May 2021: 268.551
(268.551 / 258.824) ^ (12 / 15) - 1 = 3.0%
User avatar
Topic Author
SimpleGift
Posts: 3913
Joined: Tue Feb 08, 2011 3:45 pm

Re: How Not to View Current Inflation

Post by SimpleGift »

CuriousTacos wrote: Fri Jun 11, 2021 2:46 am
Doing this for May 2021 gives:

Code: Select all

Feb 2020: 258.824
May 2021: 268.551
(268.551 / 258.824) ^ (12 / 15) - 1 = 3.0%
Thank you, CuriousTacos, for checking this calculation. I obviously made a spreadsheet formula error in attempting to follow the Dallas Fed's analysis — and have corrected the OP, changing the trend inflation rate from 2.4% to 3.0%.

However, the larger point stands. Whether one uses the CPI-U or the PCE inflation data, investors should be keeping an eye on trend inflation rates, somewhere in the 2.5%-3% range today, and not the monthly year-over-year rate of 5% that is being highlighted in the financial press — since one might expect even more "inflation sensationalism" in the months to come.
HyperCat
Posts: 66
Joined: Fri Jan 29, 2021 10:44 am

Re: How Not to View Current Inflation

Post by HyperCat »

Thanks for providing this perspective. Nothing more annoying than prominent headlines based on a two-point comparison rather than a more accurate trend line. I've argued until I was blue in the face about why higher lumber and home prices aren't "inflation," but it's a losing battle against sensational headlines. I'm at the point of just looking for ways to use some play money to exploit what I consider misplaced/overblown fear.
User avatar
#Cruncher
Posts: 3224
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: How Not to View Current Inflation

Post by #Cruncher »

SimpleGift wrote: Thu Jun 10, 2021 8:30 pm... the average trend inflation rate of about 3.0% from January 2020 to May of 2021 (dotted line, chart below):
Unfortunately there are still a couple of errors here, SimpleGift.
  • The 3.0% increase is from the February 2020 CPI-U (seasonally adjusted) -- not January 2020 --- to May 2021.
    3.0% = (268.551 / 258.824) ^ (12 / 15) - 1
  • Belying its horizontal axis labels your graph actually depicts the CPI-U from December 2019 to April 2021, not January 2020 to May 2021. Here is the correct graph: (Click it to open up an interactive version.) The annualized increase from January 2020 to May 2021 is 2.85%:
    2.85% = (268.551 / 258.687) ^ (12 / 16) - 1
    Image
I expanded this method of showing the CPI increase back to January 2016. For example, it's 8.01% for the single month increase since April, 4.93% for the year over year, 2.85% since January 2020, and 2.32% for the 64 months since January 2016.

Code: Select all

              CPI-U   Annual
         Seasonally   Growth
           Adjusted    Since

Code: Select all

May-2021    268.551
Apr-2021    266.832    8.01% = (268.551 / 266.832) ^ 12 -1
Mar-2021    264.793    8.82%
Feb-2021    263.161    8.45%
Jan-2021    262.231    7.41%
Dec-2020    261.560    6.54%
Nov-2020    260.927    5.93%
Oct-2020    260.462    5.38%
Sep-2020    260.149    4.88%
Aug-2020    259.511    4.67%
Jul-2020    258.604    4.63%
Jun-2020    257.282    4.79%
May-2020    255.942    4.93% = 268.551 / 255.942 - 1

Apr-2020    256.192    4.44%
Mar-2020    257.989    3.50%
Feb-2020    258.824    3.00%
Jan-2020    258.687    2.85% = (268.551 / 258.687) ^ (12 / 16) - 1
Dec-2019    258.203    2.81%
Nov-2019    257.989    2.71%
Oct-2019    257.387    2.72%
Sep-2019    256.532    2.79%
Aug-2019    256.118    2.75%
Jul-2019    255.925    2.66%
Jun-2019    255.423    2.65%
May-2019    255.371    2.55%

Apr-2019    255.326    2.45%
Mar-2019    254.147    2.58%
Feb-2019    252.969    2.69%
Jan-2019    252.441    2.69%
Dec-2018    252.493    2.58%
Nov-2018    252.822    2.44%
Oct-2018    252.899    2.35%
Sep-2018    252.183    2.39%
Aug-2018    251.735    2.38%
Jul-2018    251.345    2.36%
Jun-2018    251.152    2.32%
May-2018    250.786    2.31%

Apr-2018    250.275    2.31%
Mar-2018    249.517    2.35%
Feb-2018    249.300    2.32%
Jan-2018    248.721    2.33%
Dec-2017    247.736    2.39%
Nov-2017    247.378    2.37%
Oct-2017    246.657    2.40%
Sep-2017    246.551    2.36%
Aug-2017    245.205    2.45%
Jul-2017    244.280    2.50%
Jun-2017    244.218    2.45%
May-2017    244.069    2.42%

Apr-2017    244.274    2.35%
Mar-2017    243.766    2.35%
Feb-2017    243.872    2.29%
Jan-2017    243.620    2.27%
Dec-2016    242.637    2.32%
Nov-2016    242.026    2.34%
Oct-2016    241.741    2.32%
Sep-2016    241.176    2.33%
Aug-2016    240.545    2.35%
Jul-2016    240.101    2.34%
Jun-2016    240.222    2.29%
May-2016    239.557    2.31%

Apr-2016    238.992    2.32%
Mar-2016    238.080    2.36%
Feb-2016    237.336    2.38%
Jan-2016    237.652    2.32% = (268.551 / 237.652) ^ (12 / 64) - 1
I'm using the seasonally adjusted CPI-U instead of the not seasonally adjusted CPI-U used to index TIPS and I Bonds. You can get them by choosing All items in U.S. city average, all urban consumers, seasonally adjusted from this BLS webpage.
Morse Code
Posts: 198
Joined: Wed Mar 14, 2007 12:02 pm
Location: Grand Rapids, MI

Re: How Not to View Current Inflation

Post by Morse Code »

HyperCat wrote: Fri Jun 11, 2021 6:55 am Thanks for providing this perspective. Nothing more annoying than prominent headlines based on a two-point comparison rather than a more accurate trend line. I've argued until I was blue in the face about why higher lumber and home prices aren't "inflation," but it's a losing battle against sensational headlines. I'm at the point of just looking for ways to use some play money to exploit what I consider misplaced/overblown fear.
Maybe you're right and increasing inflation fear is overblown, but, for heaven's sake, it doesn't take special insight to have seen this coming. When you hand out money to seemingly everyone in return for nothing at all, you can't expect money to retain it's value.
Livin' the dream
KlangFool
Posts: 20992
Joined: Sat Oct 11, 2008 12:35 pm

Re: How Not to View Current Inflation

Post by KlangFool »

drumboy256 wrote: Thu Jun 10, 2021 11:55 pm I'm not personally worried about inflation. It's big mac economics at this point meaning companies are simply passing on supply chain costs to keep margins which in the traditional sense, has always happened, its not new. The current issue that people should be worried about is how the Fed and the ECB are devaluing dollars and euro's to maintain their QE policy of stimulating economies. However, to KlangFool's point above--- So what? Inflation, deflation, transitory, non-transitory, etc. are part of the game. If the whole thing is rigged, well then the only answer is to enjoy the ride and have perspective that you're not in control and at a minimum should have a plan. Spoiler alert, stay the course.
drumboy256,

+1,000.

1) Get rid of the illusion that we can predict anything.

2) Be prepared. Then, it won't matter what happened next.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
KlangFool
Posts: 20992
Joined: Sat Oct 11, 2008 12:35 pm

Re: How Not to View Current Inflation

Post by KlangFool »

Folks,

1) Official inflation rate does not matter. It is your own personal annual expense increase that matters.

2) As to what you think the current inflation rate is, you know your numbers. You shop for grocery, food, and gas every month. You can compare the numbers between months and years in order to know your own personal inflation rate.

3) In any case, if your portfolio is big enough as compared to your annual expense, none of this really matters.

A) Your portfolio growth will beat the personal inflation.

B) If that is not true aka even with your portfolio size, it is still not good enough. Then, it is no longer a financial problem.

4) Ignore the noise. Be prepared instead.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
deepvalleys
Posts: 23
Joined: Sat Dec 06, 2014 7:38 am
Location: Norway

Re: How Not to View Current Inflation

Post by deepvalleys »

3.0% is still a lot. But stocks should in theory keep up with inflation, right?
KlangFool
Posts: 20992
Joined: Sat Oct 11, 2008 12:35 pm

Re: How Not to View Current Inflation

Post by KlangFool »

deepvalleys wrote: Fri Jun 11, 2021 8:11 am 3.0% is still a lot. But stocks should in theory keep up with inflation, right?
deepvalleys,

Why should that matters to you if your portfolio is several times your annual expense?

Let's assume that the annual expense = 100K and your portfolio is 300K. Let's assume that the inflation is 3% and your portfolio grow 2%.

The annual expense grow to 103K but your portfolio grow to 306K.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
User avatar
alpenglow
Posts: 1250
Joined: Tue May 31, 2011 12:02 pm

Re: How Not to View Current Inflation

Post by alpenglow »

000 wrote: Thu Jun 10, 2021 9:42 pm Personally I am an inflation bull and think it's the trade of the decade.
What actions are you taking?
User avatar
Topic Author
SimpleGift
Posts: 3913
Joined: Tue Feb 08, 2011 3:45 pm

Re: How Not to View Current Inflation

Post by SimpleGift »

#Cruncher wrote: Fri Jun 11, 2021 7:33 am Unfortunately there are still a couple of errors here, SimpleGift.
#Cruncher, I'm truly humbled if the face of your excellent math and presentation skills, and am always glad when you show up in a thread to get everything sorted out in the proper way. Thank you and best regards!
Thesaints
Posts: 4112
Joined: Tue Jun 20, 2017 12:25 am

Re: How Not to View Current Inflation

Post by Thesaints »

There are two issues with the OP methodology:
- Using seasonally adjusted data makes sense when comparing monthly, or quarterly, changes. Much less when comparing data 12 months apart.

- It is nothing but a mathematical trick to show lower inflation by including a period of previous lower inflation. “Officer, you clocked me going 90 mph over this last mile, but if you had averaged including when I left my driveway I’d be well within the speed limit”
Robot Monster
Posts: 2522
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: How Not to View Current Inflation

Post by Robot Monster »

There is something called the trimmed mean "which excludes the price-change outliers (the largest increases and the largest decreases)" and is referenced as a preferred inflation metric in a Forbes article, "The ‘Inflation’ Figures Are Grossly Inflated – Here’s How". link

The readings for May 1st were:
CPI 4.99%
Core CPI 3.80%
Trimmed 2.62%
link

In that link there is also the Median CPI, which had a May 1st reading of 2.11%.

"Median CPI is the one-month inflation rate of the component whose expenditure weight is in the 50th percentile of price changes."I

Edit:
Also,
"Why is the Fed not overly worried? The @ClevelandFed's median CPI -- which looks at the median change in prices among index components -- was just 2.1% in May. It's evidence that the big inflation moves are in some outliers, not the typical price."
Twitter link <-- check out the chart in the link
Last edited by Robot Monster on Sat Jun 12, 2021 5:31 pm, edited 1 time in total.
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
User avatar
HomerJ
Posts: 16721
Joined: Fri Jun 06, 2008 12:50 pm

Re: How Not to View Current Inflation

Post by HomerJ »

It seems to be mostly caused by airlines, and used cars blip... caused by coming out of a pandemic.

Supply and demand is out of whack right now. Give it time to settle down.

Look at these numbers.

May 2020 to May 2021

All items - 5%
Food away from home - 4%
New vehicles - 3.3%
Rent of Primary residence - 1.8%
Used cars and trucks - 29.7%
Airline fares - 24.1%

Source, Bureau of Labor Statistics, Consumer Price Index
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
User avatar
sperry8
Posts: 2420
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: How Not to View Current Inflation

Post by sperry8 »

TimTheEnchanter wrote: Thu Jun 10, 2021 10:22 pm Basic logic implies that when the money supply gets to this level inflation is unavoidable. The fed is between the rock and the hard place. The fed keeps buying AAA apple paper etc, just to pump money but when it stops and eventually it will have to, watch out...current rates are artificially low because of the fed's action.
But isn't it demand for the money supplied? Not just the supply?

Japan has printed much more money than us. No inflation to be seen anywhere... cause there is no demand.
BH contests: 2020 #253 of 664 | 19 #233 of 645 | 18 #150 of 493 | 17 #516 of 647 | 16 #121 of 610 | 15 #18 of 552 | 14 #225 of 503 | 13 #383 of 433 | 12 #366 of 410 | 11 #113 of 369 | 10 #53 of 282
Thesaints
Posts: 4112
Joined: Tue Jun 20, 2017 12:25 am

Re: How Not to View Current Inflation

Post by Thesaints »

HomerJ wrote: Fri Jun 11, 2021 9:46 am It seems to be mostly caused by airlines, and used cars blip... caused by coming out of a pandemic.

Supply and demand is out of whack right now. Give it time to settle down.

Look at these numbers.

May 2020 to May 2021

All items - 5%
Food away from home - 4%
New vehicles - 3.3%
Rent of Primary residence - 1.8%
Used cars and trucks - 29.7%
Airline fares - 24.1%

Source, Bureau of Labor Statistics, Consumer Price Index
Well, "out of whack" results in higher prices. That also is "inflation". The CPI-U is an agnostic indicator; it knows nothing about the causes of price changes.

There are way to eliminate occasional spikes in prices. Seasonally adjusted CPI is one, but that addresses mostly month-over-month, or few_months-over-few_months changes. If we were to look at airline ticket prices, we would find that every year going from October into November and December, they get "out of whack". Then they get again out of whack (but in the opposite direction, going from December into late January and February.
Of course, it makes no sense to look at seasonally adjusted CPI when comparing December 2020 with December 2019. It is exactly the same season, isn't it ?
When looking farther than one year in the past also the seasonally adjusted indicator loses relevance. Maybe comparing December 2020 to October 2019 there is a seasonal component on top of a 14 months change. That is smaller than the seasonal component on top of a 2-month change when comparing December 2020 to October 2020.
When comparing December 2020 to October 2015 the seasonal effect can usually be neglected.

Besides adjusting for the season, which does not help in the year-over-year analysis, we know that the inflation calculation contains volatile components, namely food and energy. We can exclude those and this is a "physical correction" of the index.
We can operate a "mathematical correction" by looking not at the monrthly year over year change, but at the 3-month average year-over-year change. Or at the 6-months average, or at the 12-month average. all these measures tend to smooth out spikes, but are also less responsive and take longer to detect long-term inflation growth.
Thesaints
Posts: 4112
Joined: Tue Jun 20, 2017 12:25 am

Re: How Not to View Current Inflation

Post by Thesaints »

sperry8 wrote: Fri Jun 11, 2021 9:57 am
TimTheEnchanter wrote: Thu Jun 10, 2021 10:22 pm Basic logic implies that when the money supply gets to this level inflation is unavoidable. The fed is between the rock and the hard place. The fed keeps buying AAA apple paper etc, just to pump money but when it stops and eventually it will have to, watch out...current rates are artificially low because of the fed's action.
But isn't it demand for the money supplied? Not just the supply?

Japan has printed much more money than us. No inflation to be seen anywhere... cause there is no demand.
"supply to whom ?"
CPI-U measures the change in the average price for the average consumption of the average family. What if the money is not supplied to average families ?
User avatar
sperry8
Posts: 2420
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: How Not to View Current Inflation

Post by sperry8 »

Thesaints wrote: Fri Jun 11, 2021 10:03 am
sperry8 wrote: Fri Jun 11, 2021 9:57 am
TimTheEnchanter wrote: Thu Jun 10, 2021 10:22 pm Basic logic implies that when the money supply gets to this level inflation is unavoidable. The fed is between the rock and the hard place. The fed keeps buying AAA apple paper etc, just to pump money but when it stops and eventually it will have to, watch out...current rates are artificially low because of the fed's action.
But isn't it demand for the money supplied? Not just the supply?

Japan has printed much more money than us. No inflation to be seen anywhere... cause there is no demand.
"supply to whom ?"
CPI-U measures the change in the average price for the average consumption of the average family. What if the money is not supplied to average families ?
Thats my point. Supposedly the Fed created all this supply. And that is what makes everyone scared. But if there is no demand for the supply (or the supply just sits there, unused, on bank balance sheets)... no inflation.
BH contests: 2020 #253 of 664 | 19 #233 of 645 | 18 #150 of 493 | 17 #516 of 647 | 16 #121 of 610 | 15 #18 of 552 | 14 #225 of 503 | 13 #383 of 433 | 12 #366 of 410 | 11 #113 of 369 | 10 #53 of 282
atdharris
Posts: 850
Joined: Wed Jan 02, 2019 3:18 pm

Re: How Not to View Current Inflation

Post by atdharris »

The majority of the inflation seemed to come from the price of used cars and airline prices. Housing and food costs, while they did increase, were not way out of the ordinary. We're going to need to give it several months to see how it plays out, but I am not terribly worried about runaway inflation.
Seasonal
Posts: 2785
Joined: Sun May 21, 2017 1:49 pm

Re: How Not to View Current Inflation

Post by Seasonal »

The market was obviously not troubled by the inflation report. Bond prices hardly moved and stocks were up.

Supply chains were badly disrupted by covid. Businesses cut back a lot, sold off inventory and didn't replenish necessary components (badly implemented just in time inventory), didn't expand factories, laid of workers, plus shipping was disrupted (empty containers left on the west coast when they're needed in China, Suez), etc., etc. The two CPI components that increased the most (used cars and airplane travel) are prime examples. It's going to take a while for these to normalize.

I would have thought developments since the great recession would have disabused people of the quantity theory of money. The money supply went up sharply and there was lots of QE, yet inflation barely budged. The key is that velocity went down to compensate.
User avatar
HomerJ
Posts: 16721
Joined: Fri Jun 06, 2008 12:50 pm

Re: How Not to View Current Inflation

Post by HomerJ »

Thesaints wrote: Fri Jun 11, 2021 10:02 am
HomerJ wrote: Fri Jun 11, 2021 9:46 am It seems to be mostly caused by airlines, and used cars blip... caused by coming out of a pandemic.

Supply and demand is out of whack right now. Give it time to settle down.

Look at these numbers.

May 2020 to May 2021

All items - 5%
Food away from home - 4%
New vehicles - 3.3%
Rent of Primary residence - 1.8%
Used cars and trucks - 29.7%
Airline fares - 24.1%

Source, Bureau of Labor Statistics, Consumer Price Index
Well, "out of whack" results in higher prices. That also is "inflation". The CPI-U is an agnostic indicator; it knows nothing about the causes of price changes.
"Out of whack" comes back "into whack" after a while. Do you expect airline fares to go up 24.1% a year every year for the next 5-10 years? Do you expect used car prices to to go up 30% a year every year for the next 5-10 years?

The chip shortage is causing supply issues for new cars. Will this continue forever? As the pandemic goes away, the effects from the pandemic should go away. Chip production went way down during the pandemic, now orders have whip-sawed the other direction. As businesses adjust, supply and demand should stabilize again.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
Angst
Posts: 2672
Joined: Sat Jun 09, 2007 11:31 am

Re: How Not to View Current Inflation

Post by Angst »

iceport wrote: Thu Jun 10, 2021 10:20 pm
CuriousTacos wrote: Thu Jun 10, 2021 10:08 pm I agree that many news headlines exaggerate things. And I know you acknowledge that the recent trend of about 2.5% YoY is higher than the roughly 1.5% in recent years. But I think your plot deceptively makes it look like prices have merely returned to trendline of recent years. Showing a few years like the following is more complete in my opinion:

Image

What happens next is obviously unknown.
Very helpful perspective. Thanks!
Yes, 5 years adds more perspective, but I think it's still a long way from "complete". Neither is 15 years complete, but perhaps it's better than 5:

Image

I have the impression that most economists are fairly calm about the longer term prospects for inflation. As such, I am not too concerned about this either.
Last edited by Angst on Fri Jun 11, 2021 11:27 am, edited 1 time in total.
Lee_WSP
Posts: 4806
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: How Not to View Current Inflation

Post by Lee_WSP »

KlangFool wrote: Fri Jun 11, 2021 8:05 am.

3) In any case, if your portfolio is big enough as compared to your annual expense, none of this really matters.

A) Your portfolio growth will beat the personal inflation.

B) If that is not true aka even with your portfolio size, it is still not good enough. Then, it is no longer a financial problem.

4) Ignore the noise. Be prepared instead.

KlangFool
Most of history, this plays out fine. However, hyper inflation or stagflation will make balancing the budget hard. Although, I admit, it's more of a worst case scenario rather than retirement planning.
User avatar
Topic Author
SimpleGift
Posts: 3913
Joined: Tue Feb 08, 2011 3:45 pm

Re: How Not to View Current Inflation

Post by SimpleGift »

Seasonal wrote: Fri Jun 11, 2021 10:27 am The market was obviously not troubled by the inflation report. Bond prices hardly moved and stocks were up.
A most telling observation. So far, the markets are expecting a temporary surge in inflation, which settles down in a year or two, once the economic dislocations of the pandemic are worked through.

My hope is that Boglehead investors are not making any abrupt, long-term changes to their portfolio allocations, based on somewhat higher, short-term inflation trends, which may well prove temporary. All of the recent Forum threads on gold, precious metals and mining stocks, and TIPS funds are a bit concerning, and one can only hope that investors are not going overboard with inflation concerns.

Of course, what's most preferable, as discussed upthread, is for every investor to have a long-term portfolio plan that already anticipates short-term inflation spikes and is resilient to higher inflation rates in the future, come what may.
User avatar
nedsaid
Posts: 14766
Joined: Fri Nov 23, 2012 12:33 pm

Re: How Not to View Current Inflation

Post by nedsaid »

Again, my view is that most of this uptick in inflation is transitory in nature. However, I am becoming concerned that we are getting a bit complacent. It has been about 40 years since Paul Volcker and the Fed hiked up interest rates to credit card levels and slayed the beast of sustained higher inflation that we saw starting in the late 1960's and continuing into the very early 1980's. We are so used to disinflation and falling interest rates, we can't imagine anything else. I do have my concerns here but so far the U.S. Treasury Bond Yield Curve has been very well behaved and this signals that the bond market isn't too worried. But remember, what seems unlikely is not impossible.
A fool and his money are good for business.
Thesaints
Posts: 4112
Joined: Tue Jun 20, 2017 12:25 am

Re: How Not to View Current Inflation

Post by Thesaints »

sperry8 wrote: Fri Jun 11, 2021 10:05 am Thats my point. Supposedly the Fed created all this supply. And that is what makes everyone scared. But if there is no demand for the supply (or the supply just sits there, unused, on bank balance sheets)... no inflation.
Well, there is demand for the supply, but families don't get it. The people who got it instead are not going to buy 100 cars each, or a few thousand big macs. They bought bonds and stocks and there we can definitely see lots of inflation, except that it is not called inflation.
Seasonal wrote: Fri Jun 11, 2021 10:27 am I would have thought developments since the great recession would have disabused people of the quantity theory of money. The money supply went up sharply and there was lots of QE, yet inflation barely budged. The key is that velocity went down to compensate.
The key is that the QE didn't go to the families. Salaries didn't go up since 2008 (real average income went up less than 0.7% annualized). Some families did get more and you can see house prices have spiked in those areas. Corporations got all the QE and bonds and stocks and senior management compensations all also spiked.
Post Reply