Deflation Alert! Consumer Price Index (CPI) Down 0.2% in May

Deflation Alert! Consumer Price Index (CPI) Down 0.2% in May

Zacks Investment Research reports:

The Consumer Price Index (CPI) fell 0.2% in May, which was a greater decline than the 0.1% decline expected and the 0.1% decline in April. Year over year, headline inflation is up 2.0%, but almost all of that came in 2009, not in 2010. Over the last three months, the CPI is falling at an annualized rate of 0.7%, and over the last six months it is rising at a rate of just 0.3%.

Much of the recent weakness in the headline CPI is due to energy prices, but then again they were the source of most of the inflation earlier. Energy prices fell 2.9% in May following a 1.4% decline in April, but are up 14.7% year over year. However, over the last three months energy prices are falling at an annualized rate of 16.2% and are down at a rate of 2.8% over the last six months.

Zacks makes a good point about energy prices.  Remember that the CPI is actually a lagging indicator of prices.  It doesn’t really tell you if we’re heading for inflation or deflation – rather, it tells you where we were 6-12 months previously.

The commodity markets are a better indicator of where prices are heading, because they adjust in real-time.  When crude oil was rocketing towards $150 per barrel, most financial pundits were worried about inflation.  Likewise, after the black goo plummeted into the $30 range, stories about deflation were soon to follow.

CRB Commodity Index Price Chart June 17 2010

With commodity prices 50% below their 2008 highs, it’s little wonder that we’re not seeing inflation in consumer price numbers.


How were the results if we exclude food and energy?  Back to Zacks:

Because food and energy prices can be very volatile, they complicate matters for using inflation to guide monetary policy. That is why core inflation — or inflation excluding food and energy — is important, not because food and energy are not things that people need to buy. Core inflation rose by 0.1% in May after two months of being unchanged. It is up just 0.9% year over year, and over the last three to six months, the annual rate does not even round up to 0.1%.

Overall, the article concludes that deflation is a bigger threat to the economy than inflation.  And while I don’t agree with some of the Keynesian hints dropped by the author, I do agree that inflation is nowhere to be seen on the horizon.

As David Rosenberg recently said on the deflation subject:

If you haven’t noticed, real M2 is down year-over-year for the first time in 15 years. A reconstituted real M3 is deflating now year-over-year for the first time in 50 years.  Wake us up in 2015 when the inflation comes.

We couldn’t agree more.

What will tip us off if and when inflation does arrive?  I’m a big fan of the lazy man’s approach in this case.  Let’s watch commodity futures prices – if the CRB index breaks out to the upside, our interest will be piqued.

But please – don’t wake us up until then.

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