The Truth About Deflation - A Crude Analysis

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In a carefully orchestrated media campaign to justify its money printing spree, the U.S. government has been trumpeting the need to counteract the threat of deflation. While there has been disinflation (lesser inflation) since this July when a concerted global central bank intervention began to drive up the value of the U.S. dollar, even the highly under reported inflation rates that the U.S. government publishes are still positive. A look inside the figures indicates quite clearly that there is only one major source for dropping prices - oil and its derivative products. If this reverses (and it will), watch out.

The PPI for November fell 2.2% after a record drop of 2.8% in October. The core which excludes food and energy was up 0.1%. Energy prices fell 11.2% after a 12.8% drop in October. Gasoline prices had a second record monthly decline. Home heating fuel fell by a whopping 23.3% (you should note that prices are down the most just as demand it rising substantially, which doesn't make sense if supply is not changing). Food prices were unchanged on the month. For the year, PPI is up 0.4%, but the core is up 4.2%. Overall PPI could indeed be reported as negative for the year when the December figures are released.

The seasonally adjusted CPI fell by 1.7% last month - the biggest drop since 1947 when seasonal adjustments were created. Core prices were unchanged however. Food itself was up. The cost of home ownership was up. The cost of health care was up. Energy prices however were down 17% . Gasoline prices fell an eye-popping 29.5% (gas prices went down at least 75 consecutive days in a row this fall, something which has never happened before). For the year, CPI was up 1.1% and the core is up 2.0%.

This morning the NYMEX light sweet crude contract hit $38.16 even though OPEC just said it would cut daily production 2.2. million barrels (the market is sceptical that this will actually happen). This is approximately a 75% drop from the early July high. This amount of drop is too much too fast. While I do not have exact figures, oil appears to be getting close to its cost of production. Could that level be as low as $35 or even $30? Yes it could. Whatever the bottom price is, the threat of deflation will likely disappear once it is reached .. and that should be soon.

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Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.