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.
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....
Five months later, NSA inflation for 2009 so far is +1.4%. 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. 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 on a year-over-year basis at the end of deflationary recessions, including the Great Depression.
Now here is the same graph for our current deflationary downturn, plus PPI for finished goods (in green: this series was not kept before WW2):
There is no sign yet of the rate of commodity price changes turning towards the positive, year-over-year. That is likely to change by August, when the comparisons will be to the collapse in commodities that started after last July 4. That is one reason why there is a legitimate optimistic scenario whereby this recession (or this leg of a "W" shaped recession) will bottom before Labor Day.