Deflation is back.
While there have been minor deflationary trends since 2008-2009, generally representing countertrend dollar rallies in a larger inflationary trend, the latest is by far the sharpest. It still appears fairly small on this 800 week chart, a scale used to retain the 2008 surge. Notice at the far right, beginning around January 18, a steep rise comparable to the slope of the opening weeks of the 2008 episode.
First, a reminder that the FDI is a recording instrument, not a forecasting tool per se. In other words, at face value it is not telling us whether we will have deflation next week, next month, or next year. It simply tells us we have had deflation since the middle of January.
Second, the cause is an excess of debt due to having held interest rates too low too long. Debt represents demand for dollars, and its buildup the potential for any interruption in the flow of supply to trigger a surge in value. Attempts to cure it by generating yet more debt would ultimately fail.
Third, while it is not fundamentally a forecasting tool, the FDI does lead conventional measures of inflation. This is because those conventional measures act like long term moving averages; they introduce both a smoothing and a delay to what is actually happening to inflation. Unless the trend reverses powerfully and immediately, those conventional measures, including the CPI, GDP deflator, etceteras, will decline over the coming months.
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