There is an ongoing battle between goods inflation/deflation and services inflation/deflation. Generally, the goods and services should track in relatively the same direction but something special has been occurring. The central bankers have destroyed price discovery over the years and global markets are twisted into knots; no one truly knows the correct price for anything anymore.
The chart above is weighted for the goods-oriented inflation/deflation since the CRB commodities index is used in the numerator of the ratio. The internet and computers are huge deflationary machines eliminating jobs and continuing to lower prices. Electronics and other products are cheaper each passing year. Corn and wheat crops are at bumper yields. The world is awash in oil maintaining a lid on fuel prices.
On the services side, however, prices are flat or in some cases rising. Those of you paying college tuition bills see prices rise each year. Heath insurance (ACA; Obamacare) and medical costs are out of control. Prescription drugs are expensive; many Americans over 50 years old take a palm-full of pills each day. Utility bills consistently sneak higher. Haircuts cost the same or more each year. Home prices continue rising which creates the vibe that inflation exists in the economy when in reality it does not. This gap between goods and services inflation/deflation is occurring around the world.
The expectation is that the US and the world will enter a recession at some point forward and the services inflation/deflation would be expected to roll over to the downside to join the goods deflation sitting in the basement. When the recession hits, people lose jobs, they do not spend money, prices drop. Customers begin delaying services that they routinely used before the recession. Once you lose your job, your whole life will change.
Inflation proponents need the chart above to start ramping higher to prove their thesis correct, however, that appears a tougher row to hoe. It is less likely that goods inflation will all of a sudden begin moving higher to join services rather than services dropping lower to join goods, especially with a recession on the come.
The US may remain mired in deflation for a couple more years but sure as night follows day and day night, inflation will arrive again. The last time that a notable whiff of inflation existed was back in early 2011 now six years in the rear view mirror. You will know inflation when it arrives since every day all day long, coworkers, family members and strangers will complain to each other about prices of everything including milk, gasoline, food, services, utility bills, etc....; this is not happening. After the chart moves higher in the months and years ahead, the velocity of money will kick in and the money sitting idle at banks will be put to work. A multiplier effect will accelerate business activity and inflation will leap higher and then the country will likely shoot up into hyperinflation say in the 2020-2025 time frame. That will be a different problem and a future bridge to cross. For now, deflation remains in charge.
Further discussion on inflation and deflation continues below.
Previous postings of the inflation-deflation indicator have extensive write-ups on inflation, deflation and the Fed’s shenanigans over the last nine years. Type ‘inflation’ or 'inflation-deflation' into the search box in the right hand margin to study prior articles.
Inflation is Godot. Inflation has been pictured on a milk carton for the last few years (missing). Deflation rules the roost. The chart shows that more up in yields, and higher commodity prices, are needed for the indicator to move higher towards inflation.
CRB/10-Year Price = 176.28/100.34 = 1.76
Over 4.40 = Hyperinflation
The Federal Reserve needs to see the annual wage growth at +4.0% to +4.5% to be comfortable knowing that inflation has taken hold and will be sustainable going forward but this is a dirty little secret they will not discuss in public. Yellen would likely perform cartwheels in the hallway of the Eccles Building if wage growth at least breached the +3% level.
There is no demand in this sick stagnant economy that is only pumped-up by fits and starts of central banker and/or government stimulus. Deflation is defined as consumers deciding to wait for the future to buy something since they believe it will be cheaper. This mindset continues.
The structural unemployment problem remains in the U.S. and the current stagnant wage growth (wage deflation) reinforces an ongoing deflationary and disinflationary theme. Technology, computers and the Internet are huge deflationary machines. Robots continue to replace human's on the job.
The structural unemployment problem will continue in the US for years and perhaps decades forward. The unemployed and underemployed create a burden on the economy over time. The wealthy on Wall Street, in bed with the Fed, made themselves filthy rich by taking advantage of the 2008-2009 crash (easy money pumps the stock market higher) while the middle class and poor (that do not own stocks) were thrown under the bus over the last nine years.
Companies are meeting EPS (earnings-per-share) by laying off workers and squeezing more production out of existing workers (as evidenced by flat to lower top line revenues for companies across all sectors for the last couple years). Instead of creating jobs and buying equipment with the central banker easy money, companies use the dough for stock repurchase programs (buybacks) that artificially pump stock prices higher. Yes, they are greedy b*stards.
Watch Keystone's formula above; you can crunch the numbers to check the indicator every few weeks. It is shocking to see equity markets print new record highs against a disinflationary and deflationary back drop. It is unprecedented perhaps a 1930's redux. This behavior can only be chalked up to the amazing power of the central banker money-printing. The central bankers are the market. They are modern day money Gods in charge of the Temple. Kneel before their Power and Majesty.
The ECB continues its QE program pumping more money into markets so the wealthy can become richer before the whole outhouse goes up in smoke. All-time highs are printing in global stock markets. The wealthy light expensive cigars and dab the ashes on the faces of the lower middle class.
Inflation is not in sight currently. The inflation-deflation indicator moving a touch above 3.00 in early 2014 was due to rising food and beef costs. Corn and wheat prices have plummeted back to earth. Crops are producing yields at record highs this year so the food inflation will continue subsiding. The cheaper grain prices will bring down the cost of beef especially as herds increase after the culling due to drought two and three years ago.
Stagnant wages in America will prevent inflation from occurring. When wages rise, that will tell you inflation is coming fast and Treasury yields will then rise strongly. As long as wages remain flat or lower, inflation will not exist. Focus on the wage data in the monthly jobs reports.
What does all the wind-bag mumbo-jumbo above say in a nutshell? The current answer to the ongoing inflation-deflation debate is DEFLATION as much as everyone tries to ignore it and say that inflation is here to stay. After 8-1/2 years of obscene Fed and other central banker money-printing, the United States economy remains mired in deflation proving that Bernanke's grand Keynesian experiment, blessed and implemented by Fed Chair Greenspan, and now controlled by Fed Chair Yellen, as well as dovish Fed members such as Evans, may be tragically failing.
Many analysts argue against the overall ongoing global deflation hypothesis saying the view on services inflation versus goods inflation must be explored in more detail. Services are experiencing some inflationary effects while goods are in a deflationary trend. The Trump enthusiasm is creating the bump in inflation over the last few months. The chart above hints that the deflationary funk will likely continue.
All of you inflation enthusiasts do not fear, however, inflation will arrive soon perhaps in the 2018-2020 time frame and then hyperinflation in 2020 and beyond. That will be a whole new set of problems, that is if we survive the last of the disinflation and deflationary environment over the next couple years.