ECRI: U.S. Inflation Pressures Continue to Collapse

Underlying inflationary pressures dropped further in December 2008, according to the U.S. Future Inflation Gauge (USFIG) published by Economic Cycle Research Institute (ECRI). The value of ECRI's USFIG lies in its ability to measure underlying inflationary pressures and thereby predict turning points in the U.S. inflation cycle.

The USFIG declined to 85.5 (1992=100) in December from 86.7 in November, though its smoothed annualized growth rate ticked up to -36.5% from -37.7%. The gauge was pulled down in December by disinflationary moves in measures of commodity prices, vendor performance, unemployment and job growth, partly offset by inflationary moves in measures of loans and interest rates.

Lakshman Achuthan of ECRI states:

It is notable that the USFIG was in a clear cyclical downswing in mid-2008, when financial markets and monetary policy makers alike were mistakenly concerned about the threat of inflation. With the USFIG now sliding to a half-century low, U.S. inflation pressures are in full retreat. With the USFIG nose-diving to its lowest reading since 1961, U.S. inflation pressures have collapsed.

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Comments

[Obama is Bu...:]

Wall Street continues to repeat itself, claiming that inflation is falling. But money supply is increasing, the Fed's balance sheet is exploding, and the cost of living (food, property taxes, etc) continues to INCREASE. CPI and the PCE deflator are both still showing year over year increases. The data simply does not support this deflation nonsense.

Main Street figured out home prices were in a problem long before Wall Street. Time, Newsweek and US News all talked about a housing bubble months before the Wall Street Journal

Lets not forget that Greenspan, Bernanke et all already tried to pull this deflation scam in 2001. It never happened, and the low interest rates they pushed on us directly contributed to the housing bubble.

Bernanke and Paulson both assured us until about a year ago that the subprime debacle was "well contained"

Its time to stop parroting the economic foolishness. There is no deflation. Bond yields and interest rates are well below inflation (measured by money supply or cost of living, whichever you prefer).

Jan 11 11:25 PM

[Steven Hansen:]

Gramps...

this is a forward indicator. look back to Jul 2008 on the chart and see what it was predicting for today.

steven hansen

Jan 12 02:31 AM

[John Lounsbury:]

Gramps2 - - -

The thing you are not recognizing is the velocity of money. There is a summary of this in seekingalpha.com/artic....

The reason we have deflation with a massive increase in the amount of money is that the money is not circulating. It is going into bank balance sheets to replace debt securities that have lost value. If it stays in the bank, it is not on the street and has no velocity.

The problem of inflation comes sometime in the future when the additional money exceeds the amount needed for the banks to remain solvent. When this will happen is beyond the ken of most experts I know.

We had inflation in debt and equity securities and real estate due to an abnormally high velocity of money, during a period when the money supply was held to very modest increases. We are now doing the reverse.

An example: If money was leveraged 40:1 (investment banks reached that level) and is now being delevered to 10:1, a rough statement can be made that the velocity of money is reduced by 75%. That just can not happen with no economic effect unless all the dollars involved in that process are increased four-fold. Now there has been adverse economic effect and it is my estimate that number of dollars printed to date is far less than the number needed to approach economic equilibrium.

Another way to look at this is that the new money being printed is actually replacing money spent through the high velocity period (we are "printing money already spent"). That money spent in the previous years inflated the prices of securities and real estate. Part of that money is now disappearing in reduced valuations and part is being replaced with newly printed money.

At the point in time the new money exceeds the amount needed to stem the collapse, inflation will start. Many of us fear that there is no way to define that exact point, and the government will over shoot. The extent of the over shoot will be proportional to the future inflation.

Jan 12 02:29 PM