Actually, Tim makes the comment in a mocking sense, noting that
In the U.S., the latest consumer price data will be reported on Friday and we may be in for a veritable "Deflation Tsunami" from the mainstream media since we were teetering on the brink of a negative consumer price index last month.
Tim's essential point, if I read him correctly, is that the deflation we have experienced is really just the popping of the Oil price bubble.
So, am I going to get into a mud-pie flinging contest with Tim? Hardly. Actually our two views aren't that far apart.
In the first place, if the last 5 months really just were about the popping of the Oil price bubble, then Tim is right. I don't think that's true, though. As I've written before, this deflation is not just about Oil. If it were, then why didn't we have deflation every other time Oil declined precipitously?
Second, not just Oil but almost all other commodities are declining in price. For example, Bloomberg reported yesterday that:
Commodities plunged to their lowest level since June 2002, led by energy and industrial metals, on mounting signs that the global recession is deepening and demand for raw materials will decline further.
The Reuters/Jefferies CRB Index of 19 prices dropped for the sixth straight session, the longest slump since December. The gauge touched 203.25, the lowest since June 21, 2002, and has slipped 11 percent this year. Crude oil fell as much as 8.2 percent today, and copper declined the most in three months.
This deflation is driven by a precipitous global falloff in consumer demand.
But the real issue -- one that hasn't come into fruition on a large scale yet -- is whether the price declines are matched by wage declines. For example, during the Great Depression, prices fell by 25%. But wages fell 40%! If wages do not fall, it is almost impossible for a deflationary spiral to take hold.
That is where Tim and I agree, and that is the difference in my optimistic vs. pessimistic scenarios for 2009. If there are no widespread wage cuts, year-over-year deflation will be mild and probably will not last past summer. But if wage cuts spread, then we truly will be in a deflationary spiral.
Update: Import prices, including Oil, declined -1.1% in January. Typically both the PPI and CPI move in the same direction as import prices. If this holds true for January, expect a nasty deflationary surprise in the next couple of days.