Monday, May 13, 2013

The Non-Threat of Inflation

From Bloomberg:

The odds of disinflation are mounting as the world economy slows anew and commodity prices slide, defying forecasts that easy money would trigger an acceleration of prices. More than half of the world economy, including the U.S. and the euro area, instead confronts inflation below the central banks’ desired levels, according to Ethan Harris, co-head of global economics research at Bank of America Corp. in New York.

“There is a developing inflation problem: undesirably low inflation,” said Harris, a former Federal Reserve Bank of New York economist. “For central banks, this increases the pressure to maintain super-easy monetary policy.” 

Declining prices for everything from gasoline to coffee are good news for consumers. The danger comes when disinflation turns into deflation, which leads households to hold off purchases in anticipation of even lower prices, and companies to postpone investment and hiring as demand for their products dries up and profits drop. 

Let's start by looking at a chart of commodities and ETFs representing some of the largest commodity groups:

Oil has been trading between 85 and 100 for a little under a year.

Both grains (top chart; wheat, corn and soy beans) and softs (bottom chart; coffee, cotton and sugar) are in the middle of a year long decline.

Copper is also trading just above multi-lows.

And finally, gold (which I use as a proxy for inflation sentiment) has broken through support and is trading at the 200 week EMA.

This is translating into weak price pressures across the globe. 

The EU is experiencing declining prices. The rate of year over year percentage change is declining for the last three months.

And above is a chart of the year over year percentage change in CPI for the UK, US, Japan and China.  Notice that prices are very much contained.

Anyone talking about inflationary threats or hyperinflation isn't paying attention right now.