Let’s suspend the suspense … yes, it’s deflation.
The current setup recalls my iTulip post on September 6, 2008, “4, 3, 2, 1 Deflation!”. I took a lot of heat for it, but only nine days later Lehman Bros collapsed, and within weeks the word became commonplace in financial media.
I usually try to avoid the terms “inflation” and “deflation”, because they’re so widely misunderstood and misused. I prefer “depreciating currency” or “appreciating currency”, but even those terms get confused with their forex usage.
I’ve referred to the appreciating USD dollar a number of times this year, which in the Financology lexicon is synonymous with deflation. So there’s nothing fundamentally new here, but it’s become deep and persistent enough that even some of the economic world outside these pages may soon be coming to use it.
Look. US Treasury prices have been sucked into a black hole. Stock prices are down. Gold prices are down. Copper prices are down. Oil prices are down. But I haven’t mentioned the one thing all these prices have in common … they’re in USD. Those who do their accounting in other units like lira or pesos or yen are not seeing the same thing. There is only one rational conclusion: USD is up.
This is the opposite of inflation. Sure, it was only days ago the US BLS reported an annual gain of 8.3% in the CPI. And the financial press is replete with headlines and analysis proclaiming that inflation isn’t going away any time soon. Even the Federal Reserve is expecting a protracted battle to defeat it.
It’s wrong. All wrong. They’re not even looking at inflation, they’re looking at the residue of inflation in consumer prices. The current story is deflation. We could argue it’s needed, we could argue it was inevitable, but it’s a reality. Unless it reverses promptly and powerfully, consumer price inflation will quickly become yesterday’s news.