The speedy move towards deflation is stunning. A couple months ago Keystone's ratio was at 3.6, then only a couple days ago 3.3, now 3.05.
Inflation Deflation Gauge = CRB/10-yr price = 322.56/105.6094 = 3.05
Over 4 is Inflation
From 3 to 4 is Neutral, inflationists and deflationists battle
2.9 to 3.0 is Disinflation
Under 2.9 is Deflation
The low 3.05 number, and the fact that the ratio never got above 3.6 this summer, shows that Chairman Bernanke is correct about transitory inflation. During the summer of 2008 commodities bubble, when we truly had inflation, the ratio was well over 4.
As of this writing we are only pennies away from falling into disinflation as measured by Keystone's indicator. Bernanke moved with QE2 in August 2010 as we had slipped into deflation with a reading of about 2.5 for the indicator above. This tool can be used for when Bernanke will announce QE3. We should move down into disinflation and then once we drop under 2.9 into deflation that will signal that the Fed will be stepping in with quantitative easing. So the calls for the Fed to jump in now are premature, but use this gauge and it will help guide you for when QE 3 is coming; probably not before the FOMC meeting on 9/20/11.
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