The consumer price index (CPI) is the best measurement of inflation experienced by consumers. The CPI is representative of the types of goods and services the average US consumer purchases. Since 1913, the Bureau of Labor Statistics (BLS) has been recording the CPI-U (CPI for all urban consumers (a group that is representative of 87% of the US population)). This article will only consider the CPI-U.
Below is a plot of the CPI-U from 1913-2009 :
Not surprisingly, things have gotten more expensive over the past century. This is because of inflation. Annual inflation rates can be calculated by comparing consecutive CPIs (the below equation is only valid for consecutive years):
For example, in 2007, the CPI was 207.3; in 2008, it was 215.3. (215.3-207.3)/207.3 = 3.86%/year.
To predict future prices, it would be nice to have an estimate of the average inflation rate. To that end, I have calculated the inflation rate for every 12 month period (not just Jan - Jan, but also Feb - Feb, etc.) from 1913 to the present. I then calculated the geometric mean (thanks to Cyrus) of 12 month inflation rates from those numbers and got 3.26%/year. You can see a histogram of the result below:
As you can tell, there's actually a fairly large spread in the inflation rate (the standard deviation is 5.22%/year). This means that 3.26%/year does a bad job predicting the future over the short term; however, over the long term (when all the fluctuations have settled down), 3.26%/year should provide a good prediction.
Copyright © 2009 Peter Dolph