Keystone's Inflation-Deflation Indicator

Taking the 10-year price and the CRB commodities index;

336.71/99.719=3.4

Over 4 = Inflation
Between 3 and 4 = Neutral
2.9-3.0 = Disinflation
Under 2.9 = Deflation

Thus, remaining in the neutral zone, a touch closer to disinflatin than inflation.  Low reading over last year was May-June 2010 at 2.5, where the markets and economy were in deflation.  Chairman Bernanke stepped in with QE2 to drive the markets higher from August forward to now.  The Fed's easy money floated into emerging markets, copper and commodities helping create the food inflation over the last year around the globe (Mother Nature contributed to this food inflation as well).

But, despite the appearance of inflation, Keystone agrees with Chairman Bernanke in that the recent inflation is transitory in nature.  The high reading over the last year is 3.6 in late April-earl May 2011, well short of the 4 level to indicate inflation.  For comparison, during the July 2008 commodities top, the indicator peaked around 4.3 confirming our inflation woes back then.

So about a year ago we were slipping and into a deflationary type event May-June 2010. Bernake stepped in to save equities markets that were going over the falls in July-August 2010 with QE2. This catapulted the indicator back up to peak a couple months ago, but we never made it to true inflation like we experienced in the summer of 2008.  Now we are stumbling along sideways in the neutral zone between inflation and deflation.

Keystone's projection is further exploration of lower numbers for this indicator moving forward, thus, 10-year prices should move back up, yields down, despite the recent wild pop up in yields last week, and CRB should work lower as global growth slows. Once we explore disinflation/deflation again over the next few months, perhaps a year or so, then the inflation rush will come back in force, and all of Bernanke's easy money policy will come back to haunt us.  This indicator will jump higher and move up and into the 4 plus level but this is probably many months away.

Since early to mid 2009, traders continue to be too anticipatory of inflation. Typically, if everyone is on the same side of the boat, that is what not occurs, and we saw that as the indicator went into deflation a year ago. The easy money will definitely cause wild inflation down the road, it is simply a matter of how far down the road does it begin? Keystone is looking for disinflation/deflation in the months ahead which is a contrarian view. We will simply continue to track this indicator to use it as a tool to gauge the inflation-deflation battle.