Why Should Long Range Charts Be Adjusted for Inflation?

A question often raised concerning long term charts is whether or not historic price levels seen on the charts should be adjusted for inflation. After all, the argument goes, do these long range peaks and troughs have any validity if not adjusted to reflect the changes in the value of the U.S. dollar? This is a point of some controversy among analysts.

I do not believe that any adjustment is necessary on these long range charts for a number of reasons. The main reason is my belief that the markets themselves have already made the necessary adjustments. A currency declining in value causes commodities quoted in that currency to increase in value. The declining value of the dollar, therefore, would contribute to rising commodity prices. A rising dollar would cause the price of most commodities to fall.

The tremendous price gains in commodity markets during the 1970s and declining prices in the 1980s and 1990s are classic examples of inflation at work. To have suggested during the 1970s that commodity price levels that had doubled and tripled in price should then be adjusted to reflect rising inflation would make no sense at all. The rising commodity markets already were a manifestation of that inflation. Declining commodity markets since the 1980s reflect a long period of disinflation. Should we take the price of gold, which is now worth less than half of its value in 1980, and adjust it to reflect the lower inflation rate? The market has already taken care of that.

The final point in this debate goes to the heart of the technical theory, which states that price action discounts everything, even inflation. All financial markets adjust to periods of inflation and deflation and to changes in currency values. The real answer to whether long range charts should be adjusted for inflation lies in the charts themselves. Many markets fail at historic resistance levels set several years earlier and then bounce off support levels not seen in several years. It's also clear that falling inflation since the early 1980s has helped support bull markets in bonds and stocks. It would seem that those markets have already made their own inflation adjustment.