This post is a excursion from the usual price, time, volume analysis. The analysis here is something I’ve been looking at and thought some may want to look at the charts.
Over the years I have never been one to worry about inflation as it has never affected my life or spending habits. As prices of some goods increased I found prices of other goods decreased making it a wash. My income growth has always exceeded inflation on goods and services in my world. For example, I remember buying a suit in high school for around $200. Today I can buy a suit on sale for around $200 (definitely not the finest suit, but a functional one). I can buy a computer today for much less than I could in 1990 or even in 2000. Simple medicines (Tylenol and cold pills) are the same price or less than I paid twenty years ago when buying generics. I suppose if something becomes too expensive then I just do not buy it. There are always substitution goods at much less cost. As I said, I have never really seen inflation (defined by me as price growth that causes me to change my spending habits). This is just my opinion and perception as I bought “stuff” over the past 40+ years.
This summer when gasoline went up and it took $75 to fill my Explorer I decided to look at some data. The following charts provide a good picture of “inflation” over the past 10 years. I could only put six tickers on a chart and I tried to get representative sectors. I used crude oil, commodities, steel, chemicals, food and beverages, and gold. I don’t believe any one of these is a good metric to use for “inflation” or “deflation“. But viewed together they do provide a good picture. I also don’t believe the absolute numbers matter - meaning 6% or 20% only mean something when compared to previous or future measurement points.
The 10 year chart shows that oil has averaged around 64% increase in price each year. This is interesting as this is the first year I remember worrying about the cost of driving. I would say for me that I have been affected by fuel inflation in recent months but have adjusted my spending patterns and continue the same driving patterns of the past 20 years. Food and beverage has increased about 6% each year. I really don’t think any of these numbers means much unless you were trading these during that time.
The 5 year view shows most of the price inflation occurred in the last few years.
The 1 year view shows a big jump but then price growth has moderated in the past couple months. Prices of food and steel have actually had negative growth. If this negative growth continues then deflation will begin to show up in the government metrics.
The 6 month view shows no growth and significant deflation of some prices. The idea here is to keep in mind that inflation and deflation are relative. Two people could argue with one certain there is inflation and the other certain there is deflation. Both could be correct depending on the time frame considered.
Charts courtesy of Stockcharts.com
Conclusion: Inflation and deflation are relative. In the long term the economy requires inflation to function properly. The charts show long term price growth and the rate of this growth is probably what worries the governors at the Fed. But in the shorter terms, deflation of prices can be seen. Deflation is the real worry of the Fed (even though they constantly talk about inflation). Moderate inflation is required to grow the overall economy. There can be no growth with deflation and our current financial and government system is not setup to function in a deflationary environment.
The question the Fed must answer is if the current deflation is only a natural correction of a previous inflation of prices or if the deflation is the start of a new trend? Either way, I don’t see rate increases in the picture until the shorter term charts show that deflation has been removed from the short term system. I will watch the 6 month chart and post a follow up if/when the price growth decreases turn into price growth increases.
Post Modified: October 8th, 2008 at 11:48 pm
Tags: Bonds · Energy · Gold · Inflation-Deflation2 Comments
2 responses so far ↓
Deflationary trend. After we bottom and go through sideways trading then an upward push towards the 1200 area.-we will head down on our new leg of the bull market,this will settle the question . We are in the early innings of a depression.
Correction-I meant BEAR market