Friday, June 22, 2012

BPP@MIT Annual Inflation Rate Falls Below 1.5%

The Billion Prices Project @ MIT just released daily online price index data through May 31, and the annual inflation rates from that price index are displayed in the chart above going back to late 2009 (red line). According to this real-time information of major inflation trends in the U.S., inflationary pressures have been subsiding for the last year, and the current annualized inflation rate of about 1.5% through May is the lowest rate since late 2009. In contrast to the MIT-BPP inflation, annual inflation based on the CPI is running higher, at about 2.25% through May.  

The breakeven rate on regular 10-year Treasury notes versus 10-year indexed-Treasuries, a market-based measure of expected future inflation, has been trending downward from a recent peak of 2.43% in April, and is currently at 2.07%, indicating that the bond market expects future inflation to continue to remain low.  The one-year breakeven rate just turned negative, so that might indicate some expectation of mild deflation over the next year. 

Bottom Line: There doesn't seem to be any evidence that inflationary pressures are developing in the U.S. economy, and there doesn't seem to be any indication that inflation will be a problem going forward through the rest of the year.  If anything, we might see some mild deflation.  

Update: Note in the chart below that when both the BPP@MIT are scaled to equal 100 in July of 2008, they both are equal 105 at the end of May 2012, both having risen exactly 5% over the last four years (almost).  Therefore, the BPP@MIT index tracks the CPI over long periods of time, despite the fact they are tracking different baskets of goods with different weights.  In that case, it would be hard to make the case that the BPP@MIT index "inherently deflationary" (see comments).   


At 6/22/2012 1:31 PM, Blogger Jon Murphy said...

UK... I am not liking this. There's not even much in the way of upward momentum showing. Hmmm

At 6/22/2012 1:43 PM, Blogger RichmondG30 said...

Deflation perhaps?

At 6/22/2012 2:17 PM, Blogger morganovich said...

if there were upward pressure, BPP would never find it.

it's an unweighted basket of goods that massively over-represents tech.

if you live in a cell phone and eat hard drives, this is a great cost of living index, but even then, a drop in the price of an iphone cover from $10 to $9 would completely swamp a jump in a car price from $30k to $32k.

deflation is the norm for BPP.

it only tracks like products and most of them are tech. the price of a given generation of cell phone only drops. but then the next gen comes out and the price goes back up for the consumer 9as the old one goes away) but this is not accounted for in BPP which only starts tracing it then and does not compare it to the prior model.

this makes the whole index inherently deflationary.

At 6/22/2012 2:20 PM, Blogger Scott Drum said...

Except what happens when the Federal Reserve eventually has to sell the ginormous quantity of Treasuries it continues to buy?
Isn't this a bit like saying: Honey, I see no problems with our finances because we bought all of furniture using "no payments until 2013"?

At 6/22/2012 3:14 PM, Blogger kmg said...

it's an unweighted basket of goods that massively over-represents tech.

Correction. It accurately weights tech.

At 6/22/2012 6:39 PM, Blogger Craig Howard said...

If not for the Bernanke-money [not unlike the Obama-phone,] prices would be dropping -- the dollar's purchasing power would be increasing and Americans could buy more for the same amount of dollars. From the comments, I can see that prospect scares some.

I think it would be wonderful.

At 6/22/2012 10:24 PM, Blogger Benjamin Cole said...

The Chicken Inflation Littles predicted hyper-inflation with Fed QE1 and then QE2. Instead, we are teetering in deflation, and very slow growth.

The Fed needs to be far, far more assertive in promoting growth.

At 6/22/2012 10:28 PM, Blogger Benjamin Cole said...

Scott Dunn--

Who says the Fed ever has to sell the Treasuries it bought?

The Fed has successfully monetized a trillion in US debt, with no ill consequences. This is a godsend, if only people would set aside long-cherished shibboleths, and recognized what a golden opportunity we have now. We can monetize federal debt ---relieving our children of huge burdens---without setting off inflation, and in fact, with helping the current economy.

As for a dollar with a lower exchange rate, I say bring it on. Dr. Perry has noted a US manufacturing boom, and the dollar is helping that. Maybe even the domestic tourism industry will get a boost.

At 6/23/2012 2:47 AM, Blogger PeakTrader said...

It's amazing the Fed has to do all the work to prevent falling nominal growth.

The Administration needs to massively deregulate, cut spending, and cut taxes.

At 6/23/2012 6:15 AM, Blogger Jon Murphy said...

What I meant was with the accelerating growth in a number of areas, I'm expecting to see some inflation starting to creep in. It will still come but it's just a question of when

At 6/23/2012 8:25 AM, Blogger bart said...

This comment has been removed by the author.

At 6/23/2012 8:27 AM, Blogger bart said...

Deflation perhaps?

Virtually definite, the only variable is for how long. Velocity remains at both a low level and flat.

At 6/23/2012 9:44 AM, Blogger joshua said...

When it comes to deflation, what's the difference between the same model costing less and a next generation model costing the same? They are both ways of getting more value per cost unit, and it's deflationary either way.

At 6/23/2012 2:41 PM, Blogger Ron H. said...

Joshua: "When it comes to deflation, what's the difference between the same model costing less and a next generation model costing the same? They are both ways of getting more value per cost unit, and it's deflationary either way."

Assuming you mean price deflation, not monetary deflation, the difference is that it's easier to measure a decrease in price for the same model than it is to assign values to new features or capabilities that necessarily rely on subjective valuations.

That's assuming the new generation model is an improvement by some measure.


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