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.
In the Optimistic scenario, monthly inflation remains positive, but perhaps at 1/3 to 1/2 the level of last year. By the end of June, first half 2009 inflation will be in the 1.4%-2.2% range. Year over year, however, as the 2008 numbers are replaced, DEflation will be realized, falling to (-2.0%) - (-2.7%) range....
In the Pessimistic scenario, monthly inflation remains near 0%-1% in the first half, and is firmly negative, though less than 2008 in the second half. By mid-year, YoY DEflation will be somewhere in the (-3%) - (-4.5%) range....
Four months later, NSA inflation for 2009 is so far at +1.3% (NSA). Nevertheless, if there were to be a recovery soon, we would need PPI for commodities to bottom and turn around. That hasn't happened yet.
A bottom and turning around of inflation data would generally mean increased demand. So far that is not happening. April car sales, retail, and gasoline data all showed renewed cowering consumer zombies. For comparison, here is the consumer and commodity inflation data during the deflationary 1920-1950 era:
Note that commodities (in red) almost always turned up before the economy as a whole did. Typically CPI (in blue) bottomed at the end of deflationary recessions and the Great Depression.
While inflation hasn't bottomed yet, one emerging silver lining is that commodity prices (shown in red below) have fallen much further than PPI (green), which in turn has fallen more than CPI (blue), which in turn has fallen more than wages (orange):
Put together with refinancings enabled by 4.5% mortgages, and you have the price recipe you need for a recovery, once demand increases.