The Deflationary Bust bottoms

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.

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....

In the pre-World War 2 era of deflationary busts, including the Great Depression, PPI for commodities bottomed and turned around either before or simultaneously with CPI. when YoY CPI bottomed, the bust ended. Such a bottom coincided with increased demand. Here is the consumer and commodity inflation data during the deflationary 1920-1950 era demonstrating this point:

Note that commodities (in red) almost always turned up before the economy as a whole did. Typically CPI (in blue) bottomed on a year-over-year basis at the end of deflationary recessions, including the Great Depression.

In June, for the first time, YoY commodity deflation may have bottomed, rising from -13.4% to -13.2% YoY. This month's CPI is almost certainly the bottom for that metric. That the deflation in both YoY and CPI has bottomed is likely to be confirmed next month, when the comparisons will be to August 2008 when CPI was -0.4% NSA.

It is noteworthy that as of this morning, 3 of the 5 coincident indicators known to be used by members of the NBER to date the end of recessions -- real retail sales, aggregate hours worked, and industrial production -- all appear to have bottomed, consistent with the pre-WW2 deflationary bust scenario outlined above.

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Comments

Welcome back NDD!

I think you're right on deflation. On "bottoms", which bottom? The "trough" bottom caused by the financial meltdown or the ongoing bottom caused by economic structural problems? ;)

I'm staying agnostic on that one, there are too many scary things going on toxic assets being kicked down the road, still sitting there as potential bombs, the entire CRE market, the plain absurdity of saving the Zombie banks yet leaving all of the smaller and regional banks, who did nothing wrong, hanging out to dry, as well as foreclosures, unemployment.

But it appears Helicopter Ben did a few things right here.

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Deflation and the real economy

After being a veteran of many inflation vs. deflation debates, I'm coming around to the idea that it doesn't really matter all that much.
What matters is debt levels, which are still near all-time peaks.

I'm agnostic on the subject of deflation, but for different reasons than Robert. I'm agnostic because I don't think that mild deflation is necessarily a bad thing.

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MIld deflation w/o overhanging debt can be good

That's why the deflations of the 1950s were beneficial.

I suspect the longer term structural problems with debt are better shown in the chart that Tim Iacono occasionally posts, of the CS-CPI, i.e., CPI where the Case-Schiller housing index replaces owner's equivalent rent. As of last month, that was at -8% and still declining iirc.

I don't think we'll be out of the woods on the longer term structural issues until that bottoms -- and that may be a few years away.

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energy prices 28.1% decline since July 2008

To me, this can only be good but I think it worthy to pull out oil/gas from the CPI to not only show you are right, but to also show what a bubble last summer's gas prices were.

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in July before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the last 12 months the index has fallen 2.1 percent, as a 28.1 percent decline in the energy index since its July 2008 peak has more than offset increases of 0.9 percent in the food index and 1.5 percent in the index for all items less food and energy.

On a seasonally adjusted basis, the CPI-U was unchanged in July following a 0.7 percent increase in June. Small declines in the food and energy indexes offset a small increase in the index for all items less food and energy. The food index declined 0.3 percent in July with all six major grocery store food groups posting declines. The energy index, which rose 7.4 percent in June, fell 0.4 percent in July. Decreases in the indexes for gasoline, fuel oil, and electricity more than offset an increase in the index for natural gas.

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Crude Prices

I wonder about oil prices. Before we invaded Iraq, world oil production was about 69 million barrels per day. Since 2004, it's stayed around 73 million barrels/ day. Except for spikes around 1979-82 and the Persian Gulf war of 1990-91, crude prices stayed pretty tame, even during periods of inflation. During most of the Clinton years, prices tended toward the low to mid 20s. Prices were in the low 20s for a couple of years until 2003, when they started a climb to $37 in 2004, $50 in 2005, and an average of $91 in 2008. Now it's hovering aroung $70. What should the price of oil be now, and why?
Frank T.

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Frank T.

global oil

if you want to research it out, complete w/ graphs, go ahead.

we were writing about oil speculators vs. hidden, stashed supply somewhere a lot during the height....

but since that time I can tell you that whole debate seemingly has been ignored plus China has been buying up oil supplies right and left (which I wrote about).

Also note that global supply chain analysts FINALLY went past cheap labor focus exclusively and realized energy costs in shipping cheap crap from China adds costs (duh) and are looking to modify global supply chains...which would reduce oil demand. Of course they still are obsessed with cheap labor, looking at Mexico instead.

But in terms of commodities futures, oil speculation, hedge funds I have't written anything on it and neither has NDD is quite some time...so where this is at I don't have any answers at the moment.

But folks, if you want to research out a topic from first principles and write a post, that's one of the biggest features of EP....we can answer our own questions...of course it's a lot of work to do that but ya know, how many writers for the MSM do that level of homework? (not too many!)

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Latest Banking Comedy

Have you looked at the latest amendments credit card issuers are sending out announcing hikes in rates and fees?
They blame it on the economy and rising costs.

Frank T.

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Frank T.