Keystone's Inflation Deflation Indicator

Time for an update on the inflation versus deflation battle. The 10-year yield has moved up over the last three weeks now printing in the 2.2% area, with a price of 99.406. The commodities index, CRB is at 311 even.

Inflation Deflation Gauge = CRB/10-yr Price = 311/99.406 = 3.1

Over 4 = Inflation
Between 3 and 4 = Neutral; Inflation and Deflation fight it out
Between 2.9 and 3.0 = Disinflation
Under 2.9 = Deflation

The last time inflation was present was the commodties bubble in summer 2008. This past summer the gauge printed about 3.6 at its peak, then it dropped down into disinflation as the August equities sell off proceeded, then under 2.9 very briefly a month or so ago. The indicator then rebounded back up thru Disinflation into the Neutral zone again where it sits now. Disinflation and Deflation conntinues to be favored moving forward in the coming weeks and months.

Chairman Bernanke will announce QE3 when Deflation is a big threat, as it was in August 2010, when he had to step in with QE2. For now, the water is somewhat calm. Watch the CRB closely.  A move under 300 is a warning signal. If the CRB falls further thru the 290's that will indicate major trouble and a fall towards and into Deflation. A CRB under 270 should prompt Bernanke to move forward with QE3. Note that with the Arab Spring fostering uncertainty this year, as well as Mother Nature reeking havoc on food prices, and QE 2 creating asset bubbles in commodities, inflation ran up but at 3.6 was never a real threat this year. Bernanke was and is correct in describing Inflation as transitory in nature over the last year.