With governments around the world pumping trillions of dollars into the global economy, investors are becoming increasingly concerned about future inflation.

But such a wall of worry is also building over prospects of a declining U.S. dollar. The concern is that policymakers will turn to inflating their way out of swelling federal deficits.

While this view may be intuitively obvious to most investors, current market realities indicate that high rates of inflation aren't necessarily a foregone conclusion at this point. 

Review Of Inflation

The chart below shows the annual rates of inflation as measured by the U.S. CPI Index for Urban Consumers on a nonseasonally adjusted basis since 1926 through 2008. (This is the same index used to adjust Treasury Inflation-Protected Securities.)

For those of you interested in keeping track on your own, this information is readily available from the U.S. Department of Labor and may also be found in the Ibbotson SBBI 2009 Yearbook.

Based on the above data, you'll find that the average annual rate of inflation during this time period (1926-2008) was 3.0%.

Within that period, from 1926-1933, we actually experienced deflation. In fact, it took until 1945 for the CPI to get back to the level it was at in 1926.

During the ‘50s and ‘60s, inflation experienced a slow rise. The ‘70s saw inflation rise until it peaked at 13.3% in 1979. This was the year gold reached $850 per ounce and silver peaked at $50 an ounce as Bunker Hunt tried to corner the market.

WIN buttons were passed out which stood for "Whip Inflation Now." OPEC proclaimed an embargo and the price of oil went shockingly high.

This was an inflection point for inflation. During the ‘80s, inflation steadily declined and this trend continued through the ‘90s until last summer, when oil reached $150 a barrel. Since then the economy has continued to decline and price increases have been under control.

Last year, the CPI was only up 0.1%—even though gas prices had reached prices of over $4 a gallon during the summer. That's when many investors started telling us that they "knew" inflation had returned and feared interest rates were going higher.

So far this year, the index has increased 1.3% through April.

The chart below shows the average annual inflation rate by decade since 1926. By looking at inflation over longer time periods, the data is smoothed and we are able to see the long-term trends more clearly.

Inflation And Economic Growth

Our research shows a high correlation between economic growth and inflation when the economy grows faster than trend.

We used data from the Bureau of Economic Analysis to measure growth of GDP. That analysis showed that GDP grew at an average annual nominal rate of 6.68% during the period from 1926-2008.

Let's call this the trend rate of growth for the economy in the U.S. In the chart below, we compare the annual rate of growth of nominal GDP minus the trend rate by decade, and compare this growth versus the trend to the CPI.

The results show a high correlation. During the ‘30s, the economy contracted below trend and we had deflation.

During the ‘40s, ‘70s and ‘80s, the economy grew above trend and we had high levels of inflation.

Economic growth during the ‘50s and ‘60s was at trend and inflation was low.

The last 20 years has shown growth below trend with declining rates of inflation.

Watching The Right Indexes

Investors would be wise to pay attention to such leading indicators of the economy as the LEI Index or the Chicago Fed National Activity Index.

These indicators are currently still showing economic weakness, which is way below the trend rate for the economy of 6.68%.

Inflationary pressures are not likely to appear until growth in nominal GDP approaches levels in excess of trend.

Len Templeton is president of Templeton Financial Services, a Chandler, Ariz.-based adviser specializing in fixed-income portfolios. He welcomes comments and suggestions for future columns at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .