What is the "Normal" Rate of Inflation?
The US economy has experienced two different inflationary regimes.
The pre-inflationary regime extends from our prehistory to sometime between 1900 and 1930,
when inflation fluctuates widely around an average of about 0.3%,
with periods of both deflation and high-inflation.
The modern regime extends from then until now, and has an inflation rate
which averages about 3.5% to 4.0% but with less year-to-year variance.
(Also see this graph:
As a Larger PNG -
As an Acrobat PDF -
As Original Spreadsheet with all Data)
- The dark blue line on the graph gives the IF03 (Inflation Factor to 2003)
-- the amount by which prices have increased from the given year until 2003.
For example, prices have increased by a factor of about 21 from 1900 to 2003.
(IF03 is (1/CPI), normalized to 2003).
- The purple line shows the IF03 if inflation were a constant 4%. For
example, at constant 4% inflation prices would have increased by a factor of
about 10.1 since 1944.
- The pink line gives the IF03 if inflation were a constant 0.3% from
prehistory-1925 and a constant 3.3% from 1925-2003. These rates of
inflation were chosen by eye (there's no use doing a fit -- it depends too
much on when you decide the pre-inflationary epoch ends and the modern epoch
begins).
- The aqua line gives, for each year, the constant inflation rate that
yields the same inflation factor. For instance, prices have increased by
a factor of about 7.6 times since 1950 -- equivalent to a constant inflation
rate of 3.9%
I prepared this page using data from Robert Sahr's "Inflation
Conversion Factors" page at
Oregon State. Please feel free to download
the full spreadsheet with Sahr's original data and my graphs.
What is the "Normal" Rate of Return for Stocks?
Here are data from Robert Shiller's excellent collection of
Online Data.
