Deflation Is Just Around the Corner

I recently wrote a post about U.S. Treasury securities which have been rising in price as interest rates have come down. In the post, I called the Treasury rise a bubble and I stick by that moniker despite protests from some astute readers.

However, I do want to point out one reason why Treasurys are rising. Inflation.

Non-Seasonally Adjusted CPI

Inflation is plummeting and that means inflation will soon become deflation. The U.S. Consumer Price Index (CPI) was released yesterday, showing that inflation fell 1.9% in the last month alone. Prices are only 1.1% higher than last year at this time. In July that figure was 5.6%.

To be sure, much of that decline comes from the drop in oil prices - the energy index fell 17% in November. Nevertheless, this inflation report is a clear signal that prices are plummeting and that the Federal Reserve has been powerless to stop the fall.

Certainly, this is a very good reason why Treasury prices are rising.

Source: Consumer Price Index Summary - Bureau of Labor Statistics

Comments

[Jack K:]

Ed, do you think the increase in government spending is an inflation trigger or not? I think that many average people look at the federal debt/deficit and think that it is an inflation trigger. Do you disagree?

2008 Dec 17 07:06 AM

[De Graaf:]

Jack K,

The hugely inflated balance sheet of the FED is soon being used to flood the markets with liquidity to counter the deflation force that is appearing just around the corner, like Mr. Harrison titles it appropriately.
The Federal debt in itself is not necessarily an inflation trigger. The money being gathered on top of that deficit/debt most certainly is inflationary.

FED, free your horses..., deflation is coming to town.

2008 Dec 17 08:11 AM

[investor88:]

Right now deflationary forces are stronger than all the pumping by governments. The battle is not over; however with the giant opposing forces [govt vs deleveraging,deflation... battling it out the average Joe investor better stand aside?

2008 Dec 17 08:16 AM

[sheridan:]

If the dollar continues to crater- wouldn't that cause investors to demand higher interest rates/yields on long term treasuries? I'm going to be paid back in a currency worth far less than what I lent the government.
Thus far, it seems to have no effect on appetite for bonds.

2008 Dec 17 08:48 AM

[RSAAKS:]

Deflation!!!! With the exception of price at the gas pump, can someone tell me which prices are lower? At least where I live, groceries are still costing more than last years, so are my utilities, so are the services like the doctor fees-auto repair-insurence, car prices are still holding the same as lastt year, tuition is not any cheaper, interest rates charged by banks are not much lower, so where is the deflation??
Oh, the stock prices are down, way down, that must be the deflation everyone is worried about!!

2008 Dec 17 08:59 AM

[Fabien Hug:]

There is one price that is clearly lower the rent banks pay to borrow your money.

2008 Dec 17 09:20 AM

[farmer448:]

Deflation is everywhere. Stocks, home prices, Commodities, Confidence in out government.

2008 Dec 17 09:21 AM

[MMuoio:]

Wow----has he got it wrong!---this is a snapshot----inflation will rule and if you doubt it prepare to lose a lot of money. Central bankers around the world have pushed more liquidity into the markets than at anytime in the history of the world. The debasement of the USD is here and big BEN will see it through. We had better move out on the risk curve or be prepared to eat you know what!

2008 Dec 17 10:25 AM

[shrivman:]

I gotta agree with this assessment. When governments worldwide are forced to "acquire" the bad debt of banks and others in order to halt the seemingly endless slide toward the "pit", it is the relentless printing of currency that is their prime implement as counterforce. When you print endless streams of currency the inevitable result would seem to be inflation.Deflation is a concern later - after the inflationary cycle....cycles out, but when that time will be is anyones' guess. My question to all is - so what does a poor boy do? Where do you park your hard-earned and diminished stash of cash as first inflation [and potentially hyper-inflation] and then deflation wreak havoc with the worlds' economies and our own private funds.Anybody????


On Dec 17 10:25 AM MMuoio wrote:

> Wow----has he got it wrong!---this is a snapshot----inflation will
> rule and if you doubt it prepare to lose a lot of money. Central
> bankers around the world have pushed more liquidity into the markets
> than at anytime in the history of the world. The debasement of the
> USD is here and big BEN will see it through. We had better move out
> on the risk curve or be prepared to eat you know what!

2008 Dec 17 10:56 AM

[bindlepete:]

This is pretty silly . OK gasoline is down, and housing is down unless you rent. But ehat else? Medical? Education? Food? ANYTHING YOU REALY NEED TO SURVIVE?

The new rising tax burden is on the way.

Deflation is a nice idea for us relatively fixed income retirees but it is hardly real.

Does this bozo work for the Republican Economic Propaganda folk?

2008 Dec 17 11:34 AM

[JasonC:]

"can someone tell me which prices are lower"

Housing, silly, a third of consumer costs. Plus energy, a tenth or so, direct and indirect. That is 40% of costs that have been cut in half. We've only seen the headline CPI number drop 3%.

2008 Dec 17 12:15 PM

[freddie:]

Wow, Ed is usually right on, as subsequent events reveal, but this time he is declaring the moment (in relative terms) as a long term situation in the face of macro monetary policy leading (shortly in relative terms) in one direction - hyperinflation, likely hyper-stagflation. As other commenters have said, everyday consumption continues inflated, and about 6 months from now, Opec cuts will come home to roost. Instead of me laying it out, read Engdahl, slowly:

globalresearch.ca/inde...

2008 Dec 17 01:09 PM

[OldLimey:]

Deflation is a scam. Just as the the threat of terrorism was used to frighten people into accepting draconian curtailment of basic liberties, so deflation is being used to frighten people into accepting a coordinated attempt to reflate asset values to their unrealistic 2007 levels. Why? Because the world has no viable alternative economic model other than to have asset bubbles back borrowing binges by consumers.

As user 55065 and others above have explicitly or implicitly asked, where is this deflation? Drops in excessively high commodity, stock, and real estate prices are not evidence of monetary deflation. Here in the UK, petrol (gas) prices are down but not a huge amount because of sterling's death march, utility bills are higher than a year ago, food bills are flat to slightly higher than a year ago, and seasonal stuff (e.g., Christmas cards) has not dropped in price. I was looking at a piece of stereo equipment on the Web yesterday, with a 10% discount off 'recommended' price; alongside it was a (legally required) notice that it had previously been offered at a LOWER price. I'm still waiting for deflation (and no, the 16% decline in a UK property market that has trebled over the last ten years ain't evidence); but my guess is that when the pump primers in Washington and London get done kick-starting the movement of all that extra real money they've created - supposedly to fill the black hole left by evaporating funny money - inflation will get to the tape first.

2008 Dec 17 02:06 PM

[gwinner:]

The printing of money is inflationary. People loosing their jobs, homes and investments en mass is deflationary. No one knows where this is headed but it is clear that the US dollar is severely damaged. Where does one invest their money? Food storage is a good option.

2008 Dec 17 04:34 PM

[woodsey:]

Is the CPI a lie?

2008 Dec 17 05:25 PM

[austrian63:]

user 55065 hit the nail on the head. 55065, you must remember that most "experts" and writers follow the herd mentality and don't use critical thinking. Also, if they are part of the monied interests, they don't do their own grocery shopping. You are correct there is NO systemic deflation (or more appropriately no sustained decrease in the general price level). A sustained decrease in the GENERAL price level is not possible in a fiat money system.

The prices of goods and services purchased by most people on a daily basis are rising not falling. Remember, just because the herd states certain axioms over and over does not make them true. Those who are warning of deflation now never warned of the current crisis that is the unintended consequences of expansionary monetary policy. Once inflation has hit historic levels, they will be warning us of inflation.

All current policy initiatives have as their stated purpose, rflation (currency devaluation) and the ever decreasing purchasing power of the dollar will also be their unintended consequence.

2008 Dec 17 06:14 PM

[specks:]

All good things come in their own time. My gauge is the 'sequence',
deflation, re-flation, and then....HYPER-INFLATIO...

2008 Dec 17 06:43 PM

[Scott E. Vines:]

This isn't brain surgery, guys. We're seeing a deflationary correction after years of inflationary mismanagement by the Federal Reserve, Congress and all the other nations that use fiat currencies and deficit spending. That's what's supposed to happen. The deflation we're beginning to see now will get a lot worse if allowed to run its course. However, that's not politically expedient, so Washington will continue with its "stimulus" spending (i.e. printing of funny money). When this capital eventually hits the market, look to get whipsawed by runaway inflation.

2008 Dec 17 10:31 PM

[Teutonic Kn...:]

Much had been written and debated about this topic - will it be deflationary or inflationary.

Granted , on the surface, that commodity prices, housing, retail and household goods items prices, among others will most likely drop, as the economy worsens, let us recognize that corporate and personal earnings will also decline.

So while the CPI recedes, disposal income will also come down. If indeed the current crisis leads to a deepening recession and even a depression, consumers will have less bucks to chase after goods, and that means inflation.

2008 Dec 18 10:02 AM

[breckandy:]

Is it Deflation or Inflation?
I think deflation will be short lived when the trillions they are flooding the market from thin air and the USD becomes more diluted and prices will go way up.

The moratorium we have had on building the last 2 years is building up like a dam of eventual demand once the excess inventory drys up.

Watch the pendulum swing. You know they overcorrected the skid like they do every time.

2008 Dec 19 03:52 PM

[Tim T:]

@JasonC - Yes, housing is cheaper, but it only affects those looking to buy a house, which is not very many. I don't think rents have gone down that much but I'm not sure, but that's not everyone either.

Mar 02 09:58 PM