Keystone's Inflation-Deflation Indicator Continues to Signal DEFLATION

In May, Keystone's indicator dropped into Deflation. Things have not changed; the economy remains mired in Deflation. The CRB (Commodities Index) languished at 270 on the cliff edge during June but recovered. Taking a look at the numbers;

CRB/10-Year Price = 296.37/103.3438 = 2.87

Over 4 = Inflation
Between 3 and 4 = Neutral; inflationists and deflationists fight it out
Between 2.90 and 3.00 = Disinflation
Under 2.90 = Deflation

The U.S. 10-year Treasury yield is at 1.4%. Chairman Bernanke announced QE 1 and QE2 as the country became mired in deflation with Keystone's indicator in the 2.5-2.6 range. The indicator dipped into this area a month ago, albeit briefly, but then recovered. Therefore, the QE3 watch continues but for Bernanke to act, the 10-year yield will need to drop lower (price higher) as well as the CRB dropping back down thru 270 and heading lower again.  The FOMC rate decision and meeting is 7/31/12 and 8/1/12. According to the WSJ today, the Fed is open to acting with easing either 8/1/12 or at the September meeting.

Do not worry too much about the timing of QE3 since the announcement will be dictated by the deflationary pressures.  In general, focus on the CRB; once it loses 270 the Fed will stand ready with QE3. At CRB 250-270, the Fed will act with QE3. That may happen in a few days, or it may take a few weeks. CRB under 270 shows that the country is falling into a deflationary spiral a la the Great Depression or Japan in the 1990's. Bernanke will avoid deflation at all costs which will cause him to act with QE3.