Should We Be Thinking About Relative Deflation?

Housing prices continue to slump, albeit at a declining rate. Crude oil is down nearly 20% in less than a month. Copper, gold, corn, wheat all at multi month lows. Why are we so worried about inflation when the discussion ought to be focused on deflation?

As is the case with most government data points, inflation is also backward looking. Right now it looks like we could see a dramatic fall off in inflation gauges over the next few months. All of this could occur without further dramatic declines in commodity prices.

I am not necessarily talking about Japanese style deflation from the 1990s, but a retraction of the recent elevated levels of inflation that we have recently been exposed to. Call this relative deflation. By the way, by historical measure the recent levels of inflation have been quite tame. What would be the secondary impacts of relative deflation?

1. Labor cost pressures would subside and employment would rise;
2. Consumers would increase discretionary spending, or dare I say savings;
3. Lower commodity prices would spur economic expansion;
4. Alleviation of pressure by FOMC Hawks to tighten monetary policy;
5. We would begin to fill those vacant houses once again

Economic cycles come and go. Economic indicators have been cycling down for several quarters now. That will come to an end and we will begin a new economic cycle once again. Perhaps the falling prices in crude oil and commodities will be the stimulus for a new economic cycle.

Disclosure: None

Comments

[User 143167:]

New economic circles? By what? Where is the next bubble?
Without another bubble, the US economy cannot make any progress.

2008 Aug 06 06:11 AM

[investor88:]

There is good enough logic in the conclusion in this article ie falling oil and commodity prices will plant the seeds of the recovery. However there will be other relevant factors to consider and contend with in the complex US and global economy.

2008 Aug 06 08:34 AM

[CLH:]

Very good post Scott. You are right--there is no inflation. The higher prices in energy and food (which are not inflation) will soon be gone. Gold the best indicator of inflation is headed down. The dollar is headed up. Few investors can see this as they continue to invest in the past.

2008 Aug 06 09:13 AM

[User 6666:]

Someone is investing with rose-colored glasses. You can only *pretend* to define inflation away. Inflation is rampant.

2008 Aug 06 09:25 AM

[OldLimey:]

I'm glad inflation's on the way into the dustbin of history. I'll keep that in mind as I pay my next electricty bill (unit price increased last week by 18pc) and my next domestic gas bill (unit price increased last week by 28pc). A further round of increases are due here in the UK next winter - and that promise was made by the utility companies before anybody started thinking about a USD rally.

You guys just go ahead with the next bubble by yourselves. We'll be along a little later.

2008 Aug 06 01:42 PM

[HL:]

No logic at all.

2008 Aug 07 08:06 PM