Inflation Persistence
Recently we saw inflation numbers; both CPI and PPI reach record high levels. The consumer price Index in U.S. showed its biggest yearly gain since 1991 with a 5.02 percent increase since last year. Some analysts have correctly noticed how monetary inflation, measured by MZM (Money with Zero Maturity) has decelerated some what during the last couple of weeks.
Now, the million dollar question seems to be: when will price inflation slow? Looking around, we see a mixed bag of forecasts ranging from tomorrow and never. In reality inflation is really persistent. By this I mean, that once you experience a rising inflationary pressure it’s hard to make it go away, it stick to you like flypaper.
Looking back several years, I have plotted the yearly change in headline CPI in the graph below.
To get a rough measure of persistency we can look at the so called Auto correlation function, where correlation is computed for inflation with regards to its subsequent “lags”.
The result is perhaps more perplexing than one first think. In the graph below we see that inflation today is still affected by the inflation rate 140 month or almost 12 years ago!
No wonder Paul Volcker had to raise interest rates to 20 % in the 70s in order to break the back of inflation.
Based on this historical fact, I don’t intend to give a precise date when I think inflation will come to a halt. But instead, I here like to point out the strong tendency for inflation to “hang around”, for those who think otherwise.
One can do wonders with numbers. What significance would you put to your analysis of an autocorrelation of 12 years when you have 60 years of data?
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August 1, 2008 at 6:51 am