Tag Archives: Deflation

U.S. Deflation – June 14, 2017 Update

This post provides an update to various past posts discussing deflation and “deflationary pressures,” including the most recent post, that of June 28, 2016 titled “U.S. Deflation – June 28, 2016 Update.”   I have extensively written of “deflationary pressures” and deflation as I continue to believe that prolonged and deep U.S. deflationary conditions are on the horizon, and that such deflationary conditions will cause, as well as accompany, inordinate economic hardship. [note: to clarify, for purposes of this discussion, when I mention “deflation” I am referring to the CPI going below zero. Also, I have been using the term “deflationary pressures” as a term to describe deflationary manifestations within an environment that is still overall inflationary but heading towards deflation.]

The subject of deflation contains many complex aspects, and accordingly no short discussion can even begin to be a comprehensive discussion of such.  For reference, my past posts concerning U.S. deflation can be found under the “deflation” tag.

In this post I would like to highlight some recent notable developments.

Trying to assess and/or predict the possibility of U.S. deflation is very challenging for many reasons.  Among these reasons is that there are many different measures that are supposed to predict and/or depict the possibility of deflation, and they can show apparently contradictory readings.  Among these measures are both survey-based as well as market-based measures.

Another challenge is that deflation in the U.S. has been relatively non-existent since the beginning of the 20th Century.  As such, knowledge and “practical experience” with deflation is lacking.  As seen in the below chart (from Doug Short’s May 15, 2017 post titled “A Long-Term Look at Inflation“) with the exception of The Great Depression prolonged periods of pronounced deflation have practically been nonexistent, especially after 1950:

U.S. inflation long-term chart

Of note, the shortfall between the Federal Reserve’s stated inflation target (2% on the PCE Price Index) and the actual inflation reading continues.  For years there has been a continued inability for the 2% inflation target to be sustained.  For reference, here is a chart of the PCE Price Index from Doug Short’s post of May 30, 2017, titled “PCE Price Index Headline and Core Down Again in April“:

PCE Price Index Headline and Core

There are many reasons that I believe that U.S. deflation of a pronounced and lasting nature will occur.  Among the reasons for such are the following:

  • As mentioned above, the continuing inability to “create” inflation to rise above the 2% goal.
  • Prolonged and pronounced economic low- and no-growth levels experienced globally.   While there is widespread consensus that U.S. economic growth will remain positive for the foreseeable future, my analyses indicates that the economy continues to have many highly problematical areas and that the widespread consensus concerning current and future economic growth is (substantially) incorrect.
  • A renewed “flattening” of the Yield Curve.  While, for many reasons, I believe that the “Yield Curve” and its various proxies have to viewed with caution, the current trends are notable.  Below is a chart of a yield curve proxy,  showing the spread between the 10-Year Treasury and 2-Year Treasury, using constant maturity securities.  This daily chart is from June 1, 1976 through June 8, 2017, with recessionary periods shown in gray. The current value is .86%:

Yield Curve chart

source:  Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity [T10Y2Y], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed June 12, 2017:  https://research.stlouisfed.org/fred2/series/T10Y2Y

  • Continual indications of “deflationary pressures.”  I have written extensively concerning these persistent “deflationary pressures,” which have manifested in a variety of areas.
  • I continue to believe that the many continuing signs of “deflationary pressures” is a foreboding.  Among these signs is the pronounced weakness in many commodities.  One such measure is the Bloomberg Commodity Index, as seen below:  (chart courtesy of StockCharts.com; chart creation and annotation by the author)

Bloomberg Commodity Index chart

In conclusion, I continue to believe that significant (in extent and duration) U.S. deflation is on the horizon.  As discussed in the November 14, 2013 post (“Thoughts Concerning Deflation”), deflation often accompanies financial system distress.  My analyses continue to show an exceedingly complex future financial condition in which an exceedingly large “financial system crash” will occur, during  and after which outright deflation will both accompany and exacerbate economic and financial conditions.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2440.35 as this post is written

U.S. Deflation – June 28, 2016 Update

This post provides an update to various past posts discussing deflation and “deflationary pressures,” including the most recent post, that of January 27, 2016 titled “U.S. Deflation – January 27, 2016 Update.”   I have extensively written of “deflationary pressures” and deflation as I continue to believe that prolonged and deep U.S. deflationary conditions are on the horizon, and that such deflationary conditions will cause, as well as accompany, inordinate economic hardship. [note: to clarify, for purposes of this discussion, when I mention “deflation” I am referring to the CPI going below zero. Also, I have been using the term “deflationary pressures” as a term to describe deflationary manifestations within an environment that is still overall inflationary but heading towards deflation.]

The subject of deflation contains many complex aspects, and accordingly no short discussion can even begin to be a comprehensive discussion of such.  However, in this post I would like to highlight some recent notable developments.

Of note, the shortfall between the Federal Reserve’s stated inflation target (2% on the PCE Price Index) and the actual inflation reading continues.  This 2% inflation target has been “missed” (inflation has been less than 2%) for well over three years.  For reference, here is a chart of the PCE Price Index from Doug Short’s post of June 1, 2016, titled “Minimal Change in the April PCE Price Index“:

PCE Price Index

These readings can be compared against the CPI figures.  As one can see, “core” CPI remains somewhat higher than the “core” PCE Price Index:

CPI

Janet Yellen briefly commented about inflation in the June 15, 2016 FOMC Press Conference:

Our inflation outlook also rests importantly on our judgment that longer-run inflation expectations remain reasonably well anchored. However, we can’t take the stability of longer-run inflation expectations for granted. While most survey measures of longer-run inflation expectations show little change, on balance, in recent months, financial market-based measures of inflation compensation have declined. Movements in these indicators reflect many factors and therefore may not provide an accurate reading on changes in the inflation expectations that are most relevant for wages and prices. Nonetheless, in considering future policy decisions, we will continue to carefully monitor actual and expected progress toward our inflation goal.

Trying to assess and/or predict the possibility of U.S. deflation is very challenging for many reasons.  Among these reasons is that there are many different measures that are supposed to predict and/or depict the possibility of deflation, and they can show apparently contradictory readings.  Among these measures are both survey-based as well as market-based measures.

Another challenge is that deflation in the U.S. has been relatively non-existent since the beginning of the 20th Century.  As such, knowledge and “practical experience” with deflation is lacking.  As seen in the below chart (from Doug Short’s June 16, 2016 post titled “A Long-Term Look at Inflation“) with the exception of The Great Depression prolonged periods of pronounced deflation have practically been nonexistent, especially after 1950:

Long-term inflation

However, there are many reasons that I believe that U.S. deflation of a pronounced and lasting nature will occur.  Among the reasons are the following:

  • As mentioned above, the continuing inability to “create” inflation to rise above the 2% goal.
  • Prolonged and pronounced economic low- and no-growth levels experienced globally.   While there is widespread consensus that U.S. economic growth will remain positive for the foreseeable future, my analyses indicates that the economy continues to have many highly problematical areas and that the widespread consensus concerning current and future economic growth is (substantially) incorrect.  Substantial economic weakness (i.e. contraction) and deflation often occur simultaneously.
  • A continued “flattening” of the Yield Curve, as discussed in the June 21, 2016 post “The Yield Curve – June 21, 2016.”
  • Continual indications of “deflationary pressures.”  I have written extensively concerning these persistent “deflationary pressures,” which have manifested in a variety of areas.
  • Worrisome trends in various “market-based” (and to a lesser extent “survey-based”) inflationary expectations.  While there are many of these measures, one is the “10-Year Breakeven Inflation Rate.”  It is described in FRED as:

    The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities (http://research.stlouisfed.org/fred2/series/DGS10 ) and 10-Year Treasury Inflation-Indexed Constant Maturity Securities (http://research.stlouisfed.org/fred2/series/DFII10 ). The latest value implies what market participants expect inflation to be in the next 10 years, on average.

    Here is the long-term chart, with a reading of 1.50 percent as of the June 23, 2016 reading:

    T10YIE

source:  Federal Reserve Bank of St. Louis, 10-Year Breakeven Inflation Rate [T10YIE], retrieved from FRED, Federal Reserve Bank of St. Louis, June 27, 2016:  https://research.stlouisfed.org/fred2/series/T10YIE/

  • Disconcerting readings and trends from the State Street PriceStats Inflation Series.
  • An additional concern is the seemingly (very) high levels of inventory, as seen in various measures, such as Total Business:  Inventories to Sales Ratio (currently seen at 1.40 as of the April 2016 reading, updated as of June 14, 2016.)  While, for many reasons, it is difficult to know how much of a future problem this seemingly elevated inventory level is, it definitely has the potential to be highly problematical and a substantial “driver” of future price deflation, especially during an economic contraction.

It should be noted that there are many other measures of current and future inflation that imply little or no worrisome trends.  However, as I have mentioned previously, the methods in which deflation “plays out” is not necessarily incongruent with various indicators seemingly indicating little chance of deflation prior to a deflationary period.

In conclusion, I continue to believe that significant (in extent and duration) U.S. deflation is on the horizon.  As discussed in the November 14, 2013 post (“Thoughts Concerning Deflation”) deflation often accompanies financial system distress.  My analyses continue to show an exceedingly complex and difficult future financial condition in which an immensely large “financial system crash” will occur, during and after which outright deflation will both accompany and exacerbate economic and financial conditions.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2000.54 as this post is written

U.S. Deflation – January 27, 2016 Update

This post provides an update to various past posts discussing deflation and “deflationary pressures,” including the most recent post, that of September 21, 2015 titled “U.S. Deflation – September 21, 2015 Update.”   I have extensively written of “deflationary pressures” and deflation as I continue to believe that prolonged and deep U.S. deflationary conditions are on the horizon, and that such deflationary conditions will cause, as well as accompany, inordinate economic hardship. [note: to clarify, for purposes of this discussion, when I mention “deflation” I am referring to the CPI going below zero. Also, I have been using the term “deflationary pressures” as a term to describe deflationary manifestations within an environment that is still overall inflationary but heading towards deflation.]

The subject of deflation contains many complex aspects, and accordingly no short discussion can even begin to be a comprehensive discussion of such.  However, in this post I would like to highlight some recent notable developments.

Of note, the shortfall between the Federal Reserve’s stated inflation target (2% on the PCE Price Index) and the actual inflation reading continues.  This 2% inflation target has been “missed” (inflation has been less than 2%) for well over three years.  For reference, here is a chart of the PCE Price Index from Doug Short’s post of December 23, 2015, titled “The Core PCE Price Index Remains Disappointingly Below Target“:

PCE Price Index

The issue of inflation continuing to be below the 2% target seems to be receiving more public discussion by the Federal Reserve.  In the December 16, 2015 FOMC Press Conference Fed Chair Janet Yellen said the following:

Since March, the Committee has stated that it would raise the target range for the federal funds rate when it had seen further improvement in the labor market and was reasonably confident that inflation would move back to its 2 percent objective over the medium term. In our judgment, these two criteria have now been satisfied.

There are many surveys containing inflation expectations as well as “market-based” measures of the same.  One survey is the Federal Reserve’s December 16, 2015 “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2015“ (pdf); another survey can be seen in the January 2016 Wall Street Journal Economic Forecast Survey.  It should be noted that neither of these surveys shows future PCE or CPI figures below zero.

As well, The University of Michigan’s “Inflation Expectations” survey shows stable inflation expectations, and prominent surveys of corporate expectations of inflation, such as the Federal Reserve Bank of Atlanta’s Business Inflation Expectations (BIE) are also relatively stable, with the January 2016 survey showing an anticipated 1.8 percent inflation over the next year.

“Market-based” measures of inflation expectations include the Federal Reserve Bank of Atlanta’s series titled “Deflation Probabilities,” which has recently noticeably increased, but still remains low at 6% as of the January 20, 2016 reading.

Another “market-based” measure of inflation is the “10-Year Breakeven Inflation Rate,” described in FRED as:

The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities (http://research.stlouisfed.org/fred2/series/DGS10 ) and 10-Year Treasury Inflation-Indexed Constant Maturity Securities (http://research.stlouisfed.org/fred2/series/DFII10 ). The latest value implies what market participants expect inflation to be in the next 10 years, on average.

Here is the long-term chart, with a reading of 1.32 percent as of January 20, 2016:

10-Year inflation breakeven rate

source:  Federal Reserve Bank of St. Louis, 10-Year Breakeven Inflation Rate [T10YIE], retrieved from FRED, Federal Reserve Bank of St. Louis, January 26, 2016:  https://research.stlouisfed.org/fred2/series/T10YIE/

While neither the inflation surveys or “market-based” measures depict a deflationary situation – or provide strong indications of impending deflation – is it correct to assume that they would?  For many reasons I don’t believe that they will provide significant “advance” warning of impending deflation.

While deflation has many attributes and causes, one of its characteristics is its relative rarity since the beginning of the 20th Century.  As I mentioned in the November 14, 2013 post (“Thoughts Concerning Deflation”):

Given that deflationary episodes have been recently relatively nonexistent, “seeing” and “proving” explicit signs of such an impending condition is especially challenging.

I continue to believe that the many continuing signs of “deflationary pressures” is a foreboding.  Among these signs is the pronounced weakness in many commodities.  One such measure is the Bloomberg Commodity Index, as seen below:

(charts courtesy of StockCharts.com; chart creation and annotation by the author)

Bloomberg Commodity Index

Another manifestation of deflationary pressures is seen in U.S. import and export prices.

Still another sign is economic weakness.  While there is widespread consensus that U.S. economic growth remains stable, my analyses indicates that the economy continues to have many problematical areas of weakness and the widespread consensus concerning current and future economic stability is (substantially) incorrect.

In conclusion, I continue to believe that significant (in extent and duration) U.S. deflation is on the horizon.  As discussed in the aforementioned November 14, 2013 post, deflation often accompanies financial system distress.  My analyses continue to show an exceedingly complex future financial condition in which an exceedingly large “financial system crash” will occur, during  and after which outright deflation will both accompany and exacerbate economic and financial conditions.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1903.63 as this post is written

Crude Oil Price Chart From The Year 2000 – January 13, 2016 Update

One notable aspect of the financial markets is the continuing sharp drop in crude oil prices.  Other commodities have also been under selling pressure.  I view these declines, as well as other aspects of the overall financial system, to be manifestations of “deflationary pressures,” of which I have extensively written.

As discussed by the Wall Street Journal article of yesterday (January 12, 2016), titled “U.S. Oil Settles Above $30 a Barrel, After Dipping Below for First Time Since 2003“:

Big oil companies deepened their cutbacks to staff and investment Tuesday, as the price of oil briefly slipped below $30 a barrel for the first time since December 2003.

For reference purposes, here is a chart of (spot) Light Crude Oil, from the year 2000 to yesterday’s closing price, depicted on a weekly basis using a LOG scale, with price labels:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

Crude Oil prices since year 2000

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1946.41 as this post is written

U.S. Deflation – September 21, 2015 Update

This post provides an update to various past posts discussing deflation and “deflationary pressures,” including the most recent post, that of July 27, 2015 titled “U.S. Deflation – July 27, 2015 Update.”   I have extensively written of “deflationary pressures” and deflation as I continue to believe that prolonged and deep U.S. deflationary conditions are on the horizon, and that such deflationary conditions will cause, as well as accompany, inordinate economic hardship. [note: to clarify, for purposes of this discussion, when I mention “deflation” I am referring to the CPI going below zero. Also, I have been using the term “deflationary pressures” as a term to describe deflationary manifestations within an environment that is still overall inflationary but heading towards deflation.]

The subject of deflation contains many complex aspects, and as such no short discussion can even begin to be a comprehensive discussion of such.  However, in this post I would like to highlight some recent notable developments.

Of note, the shortfall between the Federal Reserve’s stated inflation target (2% on the PCE Price Index) and the actual inflation reading continues.  This 2% inflation target has been “missed” (inflation has been less than 2%) for well over 3 years.  For reference, here is a chart of the PCE Price Index from Doug Short’s post of August 28, 2015, titled “The PCE Price Index Still Below Target“:

PCE price index

The issue of inflation continuing to be below the 2% target seems to be receiving more public discussion by the Federal Reserve.  Vice Chairman Stanley Fischer gave an August 29, 2015 speech titled “U.S. Inflation Developments” as well as various mentions by Fed Chair Janet Yellen in the September 17, 2015 FOMC Press Conference.

In that Press Conference, one notable comment from Janet Yellen was the following:

Survey-based measures of longer-term inflation expectations have remained stable.  However, the Committee has taken note of recent declines in market-based measures of inflation compensation and will continue to monitor inflation developments carefully.

There are many surveys containing inflation expectations as well as “market-based” measures of the same.  One survey is the Federal Reserve’s September 17, 2015 “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2015“ (pdf); another survey can be seen in the September Wall Street Journal Economic Forecast Survey.  It should be noted that neither of these surveys shows future PCE or CPI figures below zero.

As well, The University of Michigan’s “Inflation Expectations” survey shows stable inflation expectations, and prominent surveys of corporate expectations of inflation, such as the Federal Reserve Bank of Atlanta’s Business Inflation Expectations (BIE) are also relatively stable, with the September 2015 survey showing an anticipated 1.7 percent inflation over the next year.

“Market-based” measures of inflation expectations include the Federal Reserve Bank of Atlanta’s series titled “Deflation Probabilities,” which has recently noticeably increased, but still remains low at 5% as of the September 16, 2015 reading.

Another “market-based” measure of inflation is the “10-Year Breakeven Inflation Rate,” described in FRED as:

The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities (http://research.stlouisfed.org/fred2/series/DGS10 ) and 10-Year Treasury Inflation-Indexed Constant Maturity Securities (http://research.stlouisfed.org/fred2/series/DFII10 ). The latest value implies what market participants expect inflation to be in the next 10 years, on average.

Here is the long-term chart, with a reading of 1.58 percent as of September 18, 2015:

inflation expectations

source:  Federal Reserve Bank of St. Louis, 10-Year Breakeven Inflation Rate [T10YIE], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/T10YIE/, September 21, 2015.

While neither the inflation surveys or “market-based” measures depict a deflationary situation – or provide strong indications of impending deflation – is it correct to assume that they would?  For many reasons I don’t believe that they will provide significant “advance” warning of impending deflation.

While deflation has many attributes and causes, one of its characteristics is its relative rarity since the beginning of the 20th Century.  As I mentioned in the November 14, 2013 post (“Thoughts Concerning Deflation”):

Given that deflationary episodes have been recently relatively nonexistent, “seeing” and “proving” explicit signs of such an impending condition is especially challenging.

I continue to believe that the many continuing signs of “deflationary pressures” is a foreboding.  Among these signs is the pronounced weakness in many commodities.  One such measure is the Bloomberg Commodity Index, as seen below:

(charts courtesy of StockCharts.com; chart creation and annotation by the author)

Bloomberg Commodity Index

Another manifestation of deflationary pressures is seen in U.S. import and export prices.

Still another sign is economic weakness.  While there is recent widespread consensus that the U.S. economy is “advancing,” if not “strong,” my analyses indicates that the economy continues to have many problematical areas of weakness and the widespread consensus concerning current economic vitality is (substantially) incorrect.

In conclusion, I continue to believe that significant (in extent and duration) U.S. deflation is on the horizon.  As discussed in the aforementioned November 14, 2013 post, deflation often accompanies financial system distress.  My analyses continue to show an exceedingly complex future financial condition in which a very large “financial system crash” will occur, during which outright deflation will both accompany and exacerbate economic and financial conditions.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1963.80 as this post is written

U.S. Deflation – July 27, 2015 Update

This post provides an update to various past posts discussing deflation and “deflationary pressures,” including the most recent post, that of January 27, 2015 titled “U.S. Deflation – January 27, 2015 Update.”   I have extensively written of “deflationary pressures” and deflation as I continue to believe that prolonged U.S. deflationary conditions are on the horizon, and that such deflationary conditions will cause, as well as accompany, inordinate economic hardship. [note: to clarify, for purposes of this discussion, when I mention “deflation” I am referring to the CPI going below zero. Also, I have been using the term “deflationary pressures” as a term to describe deflationary manifestations within an environment that is still overall inflationary but heading towards deflation.]

The subject of deflation contains many complex aspects, and as such no short discussion can even begin to be a comprehensive discussion of such.  However, in this post I would like to highlight some recent notable developments.

For reference purposes, here is a chart of the CPI and Core CPI as seen in Doug Short’s update of July 17 titled “June Consumer Price Index:  Year-over-Year Core at 1.8%”:

CPI

One notable aspect is that various measures show expectations concerning U.S. deflation remain at or near a zero probability for the next few years.  While the list of such measures is extensive, three prominent measures include the Federal Reserve Bank of Atlanta’s series titled “Deflation Probabilities,” the University of Michigan Inflation Expectation, and the “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2015“ (pdf).

Another notable aspect concerning inflation and deflation is whether the Federal Reserve, through its various actions, can actually “control” inflation, which would include avoiding outright deflation.  It seems that it is widely believed that the Federal Reserve can do so.  Perhaps the most prominent comments on the subject in recent years are found in Ben Bernanke’s speech of November 21, 2002, titled “Deflation:  Making Sure ‘It’ Doesn’t Happen Here.”  While I don’t agree with various assertions and conclusions made in the speech, I do agree with the general premise that “sustained deflation can be highly destructive to a modern economy,” especially given the dynamics and characteristics of our current economy and financial system.

Another noteworthy aspect of our current economic situation is that of a continuing shortfall between the Federal Reserve’s stated inflation target (2% on the PCE) and the actual inflation reading.  This 2% inflation target has been “missed” (inflation has been less than 2%) for over 37 months.  As the Wall Street Journal article of June 1, 2015 (“Inflation Misses Fed’s 2% Target for 36th Straight Month“) mentions, “April 2012 was the last time the inflation rate was on target. That’s the longest such stretch of sub-2% inflation since the 1960s.”

While many (including the views expressed in the Federal Reserve Bank of San Francisco’s July 20 Economic Letter titled “Assessing the Recent Behavior of Inflation“) seem to believe that this continuing shortfall is of little overall significance, I do believe that this shortfall is very significant, as, among other things, it shows that at this point inflation is far less “controllable” than commonly believed.

Recent market developments and other aspects show that “deflationary pressures” are in many ways intensifying.  While there are numerous measures that, in my opinion, indicate such, here are three prominent ones:

(charts courtesy of StockCharts.com; chart creation and annotation by the author)

The Bloomberg Commodity Index, now at 13-year lows (and notably less than levels seen during the Financial Crisis):

(depicted on a weekly LOG basis)

Bloomberg Commodity Index

The HUI:Gold Ratio, which is the ratio of the HUI (an index of gold stocks) to that of the physical metal itself.  One theory, perhaps the predominant one, is that the gold stocks should anticipate, or at least verify, the price movements of the physical gold itself.  An implication of such is that a declining HUI:Gold ratio is an augur of lower gold prices.  Both the absolute levels of this HUI:Gold ratio, as well its continuing decline, would seem to suggest a forthcoming decline in the gold price to a level that almost certainly will signal deflation:

(depicted on a weekly LOG basis)

HUI:Gold Weekly

Light Crude Oil, now again below $50/bbl.  Notably, the widely anticipated “uptick” in consumer spending that was supposed to accompany such a decline in the price of oil has yet to materialize.  As Janet Yellen stated at her June 17, 2015 press conference, “There are questions at this point about just how much impact we’ve seen of lower energy prices on consumer spending. The decline in oil prices translates into an improvement in household income on average of something like $700 per household, and I’m not convinced yet by the data that we have seen the kind of response to that that I would ultimately expect.”

(depicted on a weekly LOG basis)

Light Crude Oil

 

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2079.66 as this post is written

U.S. Deflation – January 27, 2015 Update

This post provides an update to various past posts discussing deflation and “deflationary pressures.”  I have extensively written of “deflationary pressures” and deflation as I continue to believe that U.S. deflationary conditions are on the horizon, and that such deflationary conditions will cause, as well as accompany, inordinate economic hardship. [note: to clarify, for purposes of this discussion, when I mention “deflation” I am referring to the CPI going below zero. Also, I have been using the term “deflationary pressures” as a term to describe deflationary manifestations within an environment that is still overall inflationary but heading towards deflation.]

As one can see in the various professional economic forecasts mentioned in this site – as well as the continually negligible readings from the Federal Reserve Bank of Atlanta’s series titled “Deflation Probabilities” – economic forecasters continue to  have virtually no expectation of U.S. deflation either in the near-term or for the next few years.  However, at the same time, as the Wall Street Journal mentioned in a January 16 article, “The Fed has fallen short of its inflation goal for 2 1/2 years…”

I continue to believe that deflationary conditions will have serious direct and indirect adverse consequences, and would both accompany and cause severe economic hardship.  As I wrote in the July 11, 2013 post titled “Would Deflation Be Beneficial?“:

Also of note is various pernicious dynamics that would likely accompany deflation.  While these, of course, would vary with the extent of deflation, many would be inimical to today’s U.S. economic and financial structure.

These dynamics are numerous and many are complex, and as such aren’t suitably discussed in a brief manner.  (For those interested, the Bloomberg article of January 21, 2015, titled “Why Falling Prices Are Actually a Really Bad Thing” does discuss various problems that arise with deflation, although I am not necessarily in total agreement with various aspects of the article, including its points and scope.)

For reference purposes, below are three charts showing the CPI, commodities, and inflation expectations:

Here is a chart of the CPI as seen in Doug Short’s update of January 16, 2015 titled “December Headline Consumer Price Index At Its Lowest Since October 2009” :

CPI headline and core

Here is a chart of the GSCI Commodity Index, shown on a weekly basis since 2003 on a LOG scale:

(chart courtesy of StockCharts.com; chart creation and annotation by the author)

GSCI Weekly

Here is a chart of the 10-Year Breakeven Inflation Rate, with a last value of 1.61% as of the January 23, 2015 update (for those unaware of this measure, an excerpt from the FRED description: “The latest value implies what market participants expect inflation to be in the next 10 years, on average.”)

10-year inflation breakeven

Source:  Federal Reserve Bank of St. Louis, 10-Year Breakeven Inflation Rate [T10YIE], retrieved from FRED, Federal Reserve Bank of St. Louis: https://research.stlouisfed.org/fred2/series/T10YIE/, January 25, 2015.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2057.09 as this post is written

Crude Oil Price Chart From The Year 2000

One notable aspect of the financial markets is the continuing sharp drop in crude oil prices.  Other commodities have also been under selling pressure.  I view these declines, as well as other aspects of the overall financial system, to be manifestations of “deflationary pressures,” of which I have extensively written.

For reference purposes, here is a chart of (spot) Light Crude Oil, from the year 2000 to yesterday’s closing price, depicted on a weekly basis using a LOG scale, with price labels:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

light crude oil price since 2000

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2025.59 as this post is written

Additional Thoughts Concerning Deflation

I have written a variety of posts concerning “deflationary pressures” and deflation as I continue to believe that deflationary conditions are on the horizon, and that such deflationary conditions will cause, as well as accompany, inordinate economic hardship. [note: to clarify, for purposes of this discussion, when I mention “deflation” I am referring to the CPI going below zero. Also, I have been using the term “deflationary pressures” as a term to describe deflationary manifestations within an environment that is still overall inflationary but heading towards deflation.]

For reference purposes, here is a chart of the Core CPI and Core PCE, as seen in Doug Short’s update of January 17, 2014 titled “Two Measures of Inflation:  CPI and the PCE Price Index and Fed Policy” :

Dshort 1-17-14 - CPI-PCE-core-comparison

I consider it highly notable that while various “deflationary pressures” continue to manifest expectations of deflation among various parties and measures remain (almost entirely) nonexistent.  For example, one can see in the various professional economic forecasts mentioned in this blog economic forecasters have virtually no expectation of deflation either in the near-term or for the next few years. As well, continually low readings from the Federal Reserve Bank of Atlanta’s series titled “Deflation Probabilities” continue to show negligible possibilities for deflation.  Furthermore, businesses don’t appear to have significant concern over deflationary conditions.  This can be seen in a variety of measures and surveys, with one being seen in my ProfitabilityIssues.com post of January 15 titled “Businesses’ Forecasts Of Long-Term Inflation And Year-Ahead Unit Sales Growth.”  This negligible expectation by businesses concerning deflation – or even a significant lessening of the aggregate price level – seems especially notable given many overt signs of increased discounting and other indications of mounting pricing pressures.

As compared to the above, there does appear to be increased recognition concerning the possibility of deflation internationally.  This can be seen in many measures and commentary, such as Haver’s January 15 “EMU Inflation Hits the Lower Bound.”

There are likely many reasons why there is a pronounced lack of concern over future U.S. deflation.  Of course, one obvious reason is that near-term deflation is indeed not going to happen – i.e. the aforementioned widely-held expectations concerning no near-term deflation are indeed correct.  Conversely, other reasons may explain why – despite many overt signs of building “deflationary pressures” as well as clear recent downward trends in CPI and other measures – that near-term deflation is not a concern.  One of these reasons may well be that incidents of U.S. deflation have been, over the long-term, very infrequent.  This pronounced lack of occurrence may have fostered (considerable) complacency.  This long-term infrequency can be seen in Doug Short’s long-term CPI chart, as seen in his January 16 update titled “A Long-Term Look at Inflation” :

Dshort 1-16-14- inflation-1872-present

Another reason – likely correlated to the infrequent (from the long-term perspective) incidents of deflation – is the seemingly (very) widely held belief that the Federal Reserve can prevent deflation.  This belief is likely highly buttressed by the above chart – given that since 1913 (when the Federal Reserve was created) both the frequency and magnitude of deflation has noticeably decreased.

Also, because of this relative lack of deflation over the past 100 years, not only may there be (considerable) complacency regarding the possibility of deflation – but there may be a widespread inability to “spot” or “predict” impending deflation.  As I mentioned in the November 14 post (“Thoughts Concerning Deflation”):

Given that deflationary episodes have been recently relatively nonexistent, “seeing” and “proving” explicit signs of such an impending condition is especially challenging.

In conclusion, I continue to believe that deflationary conditions are on the horizon.  As discussed in the aforementioned November 14 post, deflation often accompanies financial-system distress.  My analyses continue to show an exceedingly complex future financial condition in which a very large “financial meltdown” will occur, during which outright deflation will both accompany and exacerbate economic and financial conditions.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1844.86 as this post is written

Thoughts Concerning Deflation

I have written a variety of posts concerning deflation and “deflationary pressures” as I continue to believe that deflationary conditions are on the horizon, and that such deflationary conditions will cause, as well as accompany, inordinate economic hardship.  [note: to clarify, for purposes of this discussion, when I mention “deflation” I am referring to the CPI going below zero.  Also, I have been using the term “deflationary pressures” as a term to describe deflationary manifestations within an environment that is still overall inflationary but heading towards deflation.]

For reference purposes, here is a chart from Doug Short’s post of November 11, 2013 titled “Two Measures of Inflation:  CPI and the PCE Price Index and Fed Policy” showing long-term trends of the Core PCE and Core CPI measures:

Dshort 11-11-13 CPI-PCE-core-comparison

As one can see in the various professional economic forecasts mentioned in this blog – as well as the continually low readings from the Federal Reserve Bank of Atlanta’s series titled “Deflation Probabilities” – economic forecasters have virtually no expectation of deflation either in the near-term or for the next few years.

However, many of the “deflationary pressures” that I have discussed in recent blog posts, such as the June 10, 2013 post titled “The Prospect Of Deflation,” continue to portray a tenuous situation.  As well, sundry other deflationary concerns have arisen.  While my posts have focused on U.S.-based deflationary pressures, notably there also appears to be concerns over “too low” inflation elsewhere, such as that seen in the Wall Street Journal story of November 5, 2013 titled “ECB Comes Under Pressure Over Low Inflation.”

Predicting the timing and extent of future deflation is challenging, for a number of reasons.  One facet of this challenge is that while the U.S. has had many periods of deflation, most – with the exception of the (historically) brief episode in 2008-2009 – occurred many decades ago.  As well, the frequency of deflationary periods has lessened as time has progressed.  An excerpt concerning historical U.S. deflation, from the NBER Working Paper #19238, of July 2013 (© 2013 by Matthias Fleckenstein, Francis A. Longstaff, and Hanno Lustig)  titled “Deflation Risk” :

We will simply observe that deflation was a relatively frequent event during the 19th Century, but has diminished in frequency since then. Bordo and Filardo (2005) report that the frequency of an annual deflation rate was 42.4 percent from 1801–1879, 23.5 percent from 1880–1913, 30.6 percent from 1914–1949, 5.0 percent from 1950–1969, and zero percent from 1970–2002. The financial crisis of 2008–2009 was accompanied by the first deflationary episode in the U.S. since 1955.

Given that deflationary episodes have been recently relatively nonexistent, “seeing” and “proving” explicit signs of such an impending condition is especially challenging.

However, I continue to believe that the continuing signs of “deflationary pressures” is a foreboding, and that actual deflationary conditions will occur after the next “financial crash.”  As the aforementioned NBER “Deflation Risk” paper mentions, deflation often accompanies financial-system distress.  Another excerpt from the paper:

Although Atkeson and Kehoe (2004), Bordo and Filardo (2005), and others show that not all deflations have been associated with severe declines in economic output, a common thread throughout U.S. history has been that deflationary episodes are typically associated with turbulence or crisis in the financial system.

In conclusion, I continue to believe that deflationary conditions are on the horizon.  As I mentioned in the aforementioned “The Prospect Of Deflation” post:

While many will undoubtedly worry about deflation when it becomes  a headline topic, waiting for such a level of “certainty” will likely prove costly.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1782.00 as this post is written