Keystone's Inflation Deflation Gauge 5-1-11

With the gasoline and food prices rising daily, a look at Keystone's Inflation Deflation Gauge is in order.  Taking the CRB and dividing by the 10-year price yields,

370.6/102.8 = 3.61

Above 4 is inflation
From 3 to 4 is neutral territory
From 2.9 to 3 is disinflation
Below 2.9 is deflation

To recap the last few years, the commodities bubble top in July 2008 shows a reading above 4 and topping around 4.3 which verified the firm inflation we were experiencing back then.  In 2004, the gauge was down around 2.6, this was the deflationary scare period.

After the commodities and equites bubbles popped in H2 2008, we were in a deflationary nightmare with a guage reading towards 2 in March 2009, which marked the bottom in the indexes.  2010 began with disinflation since the gauge was around 2.9.  The gauge traveled lower with increasing deflation into June 2010, last summer.  Then Chairman Bernnake, playing the role of Santa, sprinkled QE2 and the markets never looked back, the cheap easy money flowing into emerging markets, copper, gold, silver, oil and any other hot sector.  From the Fed's rally call last summer, to now, Keystone's Inflation Deflation Gauge moved from the 2.5 level in May/June 2010 to 3.6 now.

Relatively, it is easy to understand how we are all up in arms about inflation since the move has occurred from deflation, thru disinflation, then up into the top half of the neutral territory towards inflation, in a matter of months, so velocity plays a part in human awareness.  But, the guage is not where it was at in summer of 2008 during the last bubbles, and thus, is not in the firm inflation camp, it remains in the transition zone, neither disinflation or inflation.

Therefore, either inflation continues, via the CRB commodities index continuing skyward, while the 10-year rates continue to rise (10-year price lower), to catapult the guage over the 4 level and confirm inflation, or, we are currently topping out with this gauge now, and Chairman Bernanke is correct in his hypothesis about infaltion being temporary, and hte gauge will move back down.

And, considering that the CRB printed a hanging man candle on the weekly chart, along with negative divergence across all indicators, as well as negative divergence across all indicators with the daily chart, the CRB most definitely does not want to go up further, it is topping now.  As CRB moves down, this will decrease the gauge value.  Also, the ten year rate moving lower will lower the gauge value as well.

At 3.61, Keystone's Inflation Deflation Gauge currently agrees with Chairman Bernanke, inflation looks to be temporary in nature.  If the guage, however, prints above 4, then Bernanke was wrong and inflation is, and was, serious.  Current outlook is for the gauge to move back down and we are probably seeing the brunt of these inflation affects, via gasoline and food, now, but these conditions should improve moving forward.  But the relaxation in the inflation concerns will be at the expense of the overall markets since this will indicate that the global recovery is definitely stalling. We will check the gauge again as conditions warrant.