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Deflation For Now, Inflation Later

That's the message of the sharp drop in the PPI (Producer Price Index). Inflation for later.

The inflation threat can be described in the equation:

MV=PT,

where M is the money supply, V is the velocity of money, P is the price level, and T is the number of transactions.

When most people talk about inflation (as a monetary phenomenon), they mean that large increases in M, the money supply, in excess of T, the increase in the number of transactions, will be reflected in a higher P, price level, the change of which represents inflation. Or, holding V, velocity constant:

(M+delta M)*V=(P=deltaP)*(T+deltaT).

Therefore, since delta M.>delta T, P must be rising, and delta P (inflation) is a positive term.

Currently, however, the problem is that V, velocity of money is not constant (or rising). It is falling, as banks stop lending, consumers stop spending, and hedge funds deleverage. The rate of change of V is NEGATIVE, to a degree that reduces BOTH terms of MV and PT (even though M is rising).

A Falling "PT" is now being shared between falling transactions demand (a recession) and falling prices. That's why we have deflation for now.

Later, when V stabilizes, as it must, then a rising M will be reflected in a rising P. Unless, of course, T rises commensurately with M. But that may be too much to hope for.