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US Inflation

The history of the US has seen a series of fluctuations in inflation rate as prices tend to rise with growth and monetary policy is set to readjust them. In recent years there has been a steady increase in inflation rates, making a look at trends of the past pertinent indicators of the future outlook.

Inflation is an economic indicator that assesses the fall in purchasing power of a currency. This is measured through various types of price indices including the Consumer Price Index and Producer Price Index (measuring prices set by producers for their output), using data obtained by the government. Inflation is generally the percentage increase in these numbers, although it is nearly impossible to assess exactly due to changes in consumer preferences. Usually inflation is caused by an increase in the money supply, which leads to price increases.

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-Wikipedia, Raw data from http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx

As shown in the graph, US inflation has experienced much fluctuation over the past century, though now is at a very similar rate as around 1915. Some analysts identify a 15-20 year cycle of trends, alternating between steady increases and decreases. This would place the beginning of an uptrend at 2002, projecting continuously rising rates for the next 10-15 years.

Analysts have also noted several similarities between the current economic climate and that of the 1970s when the US experienced some of the worst inflation and volatility in its history. Most striking are the high prices of gold, strain on the supply of oil (due to the war in Iraq and booming Asian economies), decade-opening recession, and of course the quickly rising inflation rate (contributed to by government spending on Hurricane Katrina relief and the war in Iraq). A war in the Middle East worsened inflation in the 1970s similarly to the war in Iraq’s current aggravation of the many inflationary tendencies in the market.

So far, since about 2002, analysts’ predictions have proved correct. Both CPI and PPI have seen not only growth but increased rates of growth, especially PPI. The federal funds rate has seen similar growth, beinning a trend in 2004 and now raised for the sixteenth consecutive time on May 10th. The consistency of this trend has contributed to the anticipation of continued inflation, and its correspondig anti-inflationary rate hikes. Despite Federal confirmation of the trend, however, many other economic indicators have recently given the opposite message, such as the low NFP figure. It is difficult to discern to which source of data business will react more strongly.

The general belief in the strength or the weakness of the dollar may, in the end, have much to do with how much faith people put into historical trends. As the economy worsens forex traders tend to view the dollar as weakening, therefore shorting it. In the long term, however, the Fed may continue to raise interest rates, making it instead more desirable to buy the dollar. If the current fear of inflation persists, Fed contractionary policies can be expected, having a significant impact on the forex market. Looking to the past for cyclical patterns and familiar factors may prove extremely useful in making decisions for the future.

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