Friday, October 1, 2010

Is the Threat of Deflation Past?

Consider the following headlines from today's Bloomberg:

Copper Climbs to Two-Year High on Chinese Manufacturing, Weakening Dollar

Gold Advances to a Record as Slumping Dollar Spurs Demand From Investors

Cocoa Rises to Six-Week High in New York on Ecuador Clash; Sugar Declines

Rubber Climbs to Five-Month High as China's Manufacturing Growth Quickens

The gold headline is particularly interesting as it is often used a a hedge against inflation. Now, part of the recent rise is the "uncertainty" trade (or maybe I should call it the Glen Beck trade). However, gold is considered a fundamental store of value and inflation hedge as well.

Let's take a look at the data:

PPI for crude goods printed a series of negative month to month decreases earlier this year. But, the last two months have seen some large increases.

Intermediate goods saw two months of negative numbers, but printed an increase last month.

Overall PPI has printed some low month to month increases the last 5 months, with one month printed a negative number.

CPI printed some very low numbers (and even went negative) for most of 2010. But the number has printed strong increases the last two months.

I don't think we're out of the woods yet. But the last few months of PPI and CPI data are very encouraging. In addition, we continue to see commodities increase. Finally, with the dollar moving lower, further commodity increases (or at least price stagnation at current levels) is high. Short version: another few months like this and we will be out of the woods.