This morning the BLS reported that consumer inflation remained unchanged (seasonally adjusted) in June, declining -0.2% NSA. Year-over-year prices have fallen - 2.1% into deflation. YoY consumer deflation is only surpassed by 1949's -2.9% in the post-Depression era.
The 2009 first half inflation data unfolded in accord with the optimistic scenario I laid out in January:
In the Optimistic scenario, the fiscal and monetary stimuli, together with intelligent new political leadership in Washington, halt the meltdown perhaps by mid-year, and wage reductions remain the exception. In the Pessimistic scenario, the stimuli fail, and wage reductions spread, leading to a wage-price deflationary spiral.
This morning the BLS reported that consumer inflation increased +0.1% (seasonally adjusted) in May, (rising 0.3% non-seasonally adjusted). Year-over-year prices have fallen -1.3% into deflation. YoY consumer deflation is only surpassed by 1949 in the post-Depression era.
The first 5 months of inflation data are still in accord with the optimistic scenario I laid out in January:
In the Optimistic scenario, the fiscal and monetary stimuli, together with intelligent new political leadership in Washington, halt the meltdown perhaps by mid-year, and wage reductions remain the exception. In the Pessimistic scenario, the stimuli fail, and wage reductions spread, leading to a wage-price deflationary spiral.
No kidding?!?!?! " Mr Plosser says, “To sum up, I am optimistic that the economy and the financial system will recover,”
I could have said the same thing because it always does recover but recover to what? Will it recover to a robust growing economy or to a leg-less economy?
Their money printing presses have been burning up motors trying to print enough money to pay off whoever they've made arrangements to payoff.
Their favorite way to monetize debt is again going to raise its head. I think we have discussed the good old Carter days of inflation. I have a serious concern that if the inflation kicks in that we may wish for the Carter days.
Add to the inflation the coming Cap and Trade energy inflation generator and we will wish that things were as calm as the carter days.
In my recent series, Economic Indicators during the Roaring Twenties and Great Depression, I concluded that the indicators that were studied from the Deflationary period of 1920-1950 suggested that this recession might bottom out in about Q3 2009. But with anemic wage growth to say the least, such a weakly based recovery might be doomed at birth to be short-lived.
All the deflationary recessions from 1920 - 1950 followed a pattern. The CPI declined from the beginning of the recession and its YoY rate of decline bottomed immediately before the recession's end. M1 money supply followed a similar pattern, sometimes coincidentally, sometimes leading slightly. In all 6 of the deflationary recessions during the period of 1920-50, once M1 and CPI both declined at a decreasing rate, the recession was about to end.
This morning the BLS reported that consumer inflation ramined unchanged (seasonally adjusted) in April, (rising 0.2% NSA). Year-over-year prices have fallen -0.7% into deflation. YoY consumer deflation is only surpassed by 1949 in the post-Depression era.
The first 4 months of inflation data are still in accord with the optimistic scenario I laid out in January:
In the Optimistic scenario, the fiscal and monetary stimuli, together with intelligent new political leadership in Washington, halt the meltdown perhaps by mid-year, and wage reductions remain the exception. In the Pessimistic scenario, the stimuli fail, and wage reductions spread, leading to a wage-price deflationary spiral.
Sometime in the next couple of years we are going to see the virtual death of the dollar and its death is going to be perpetuated by the very recovery the administration is now engineering.
The death I speak of may not necessarily come in the form of terrible exchange rates, but it will definitely manifest itself in the form of very high interest rates and likely inflation as well (through commodities again).
Here is a screen shot of the monthly readings of CPI for the last 3 years:
I include this because if you keep in mind what has been happening with Oil prices over that same time, a pretty decent picture of what is likely to happen to prices in 2009 takes shape. Remember that from August 2006 through January 2007, Oil prices decreased over 35% from $80 to under $55. Then Oil took off on a tear, hitting $147.50 in July 2008, before collapsing to under $35 by the end of the year. Oil prices are seasonal, rising in the first half of the year, and dropping in the later part of the year, and this is reflected in the "seasonal adjustment" of consumer prices.
Consumer prices in December fell ( -1.0 %) non-seasonally adjusted. Inflation for the entire year 2008 was 0,1%! (meaning I have officially won my bet wtih Bonddad). In the first seven months of the year, driven by soaring gas prices, inflation surged 4.6%. And then the deflationary bust hit. In the last 5 months, prices have fallen ( - 4.4 %), or at an annual rate of ( - 11.0%). Here is how our Deflationary Recession compares with others from the past 100 years, as of year end 2008:
It is clear that we are in an economic environment that we have not seen in over half a century. Statistics that have been generated only since World War 2 cover a period of time which was marked almost exclusively by continuous inflation. The last deflationary recession was in 1949-50.
As a result, many measures that accurately forecast changes in the economy during an inflationary period (for example, a positive sloping yield curve) may not apply now. Thus, I have been looking for statistical measures or comparisons that have data back to 1929, and appear to have given accurate readings even during deflationary periods. In general, it appears that the Kasriel indicator of positive yield curve + M1 money supply consistently growing in an absolute sense, and also faster than inflation did accurately coincide with periods of growth even during the Great Depression. Additionally, M2 money supply growing faster than commercial bank loans also coincided with the onset of recovery even prior to WW2. I have also looked at the role of an increase in the rate of real residential investment compared with GDP as a harbinger of recovery.
Update 2, Nov. 7, 2008: We got three new pieces of data this week, 2 on the monetary front, and one on the inflation front.
On the monetary front, M1 was updated weekly, increasing to ~ +8% YoY. Monetary base continues to soar, up about 60% YoY now!
Meanwhile the ISM manufacturing "prices paid" index showed that more prices are declining than increasing at the producer level:
This is our first October inflation reading, and it strongly suggests we will get another month of deflation when the PPI and CPI come out in 2 weeks.
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