This post is about the Consumer Price Index (CPI). Many criticize the CPI for understating price-increases prices, but this post is not meant to critique it. I want to address two questions:
.CPI rose 2%-3% in the 1950's and for most of the 1960's. Then, starting in the late 1960's, it rose inexorably to 12%
It began to drop again in the mid-1980's and early 1990s.
Since then, CPI rises have averaged around 3% per year.
So, what happens in the future? Will we see CPI rising at 6%, 8%, 10%, as in the past?
Implied market-expectation: Future implied CPI-expectation is computed by looking at the yield on two types of US government securities: regular bonds, and bonds where the government adjusts for CPI-changes ("TIPS").
Right now, the implied estimate is that CPI is that it will be about 2% for the next few years, rising to about 2.5% (annualized) over the next 5 years.
In other words, market-prices are implying low (3%) CPI levels for the next 5 years. In fact, the implied rate is low going out all the way to 2020.
Disclaimer: This post is not meant as investment advice.
Reference: Fed paper titled: "Inflation Expectations: How the Market Speaks" (2005)
- How has the CPI been doing?
- What are the market-expectations for CPI, over the next few years?
Short term history: Over the last 9-years, this is what we see...
... CPI risen about 3% a year in the early part of this period.
... the housing-bust caused CPI to drift lower
... now, it seems headed back to 3% a year
Long-term history: See the chart below. Looking back 50 years, the first thing that pops out is that the range of rates (even rates averaged across 5-year periods) is very large
... CPI risen about 3% a year in the early part of this period.
... the housing-bust caused CPI to drift lower
... now, it seems headed back to 3% a year
Long-term history: See the chart below. Looking back 50 years, the first thing that pops out is that the range of rates (even rates averaged across 5-year periods) is very large
.CPI rose 2%-3% in the 1950's and for most of the 1960's. Then, starting in the late 1960's, it rose inexorably to 12%
It began to drop again in the mid-1980's and early 1990s.
Since then, CPI rises have averaged around 3% per year.
So, what happens in the future? Will we see CPI rising at 6%, 8%, 10%, as in the past?
Implied market-expectation: Future implied CPI-expectation is computed by looking at the yield on two types of US government securities: regular bonds, and bonds where the government adjusts for CPI-changes ("TIPS").
Right now, the implied estimate is that CPI is that it will be about 2% for the next few years, rising to about 2.5% (annualized) over the next 5 years.
In other words, market-prices are implying low (3%) CPI levels for the next 5 years. In fact, the implied rate is low going out all the way to 2020.
Disclaimer: This post is not meant as investment advice.
Reference: Fed paper titled: "Inflation Expectations: How the Market Speaks" (2005)
When comparing CPI rates, one has to normalize for how they are collected. IIRC, the formula for CPI was changed to understate the actual (if computed using a constant formula) inflation in the '90's
ReplyDeleteYes, it is possible that the CPI understates day-to-day price increases by some extent, but I think it does a pretty decent job and I don't believe it is off by more than a small amount (say 1% - 2%) on an average annual basis. Of course, given the effect of compounding, even a small difference can add up over years.
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