Deflation Arrives In America

The headlines are clear enough. You read in all media commenting on the world economy things like,’Inflation Not Rising Yet’, implying that it will be rising soon enough. The thought that inflation might not be returning at all, but its opposite number deflation , has clearly not yet occurred to people.

And yet in the last months in the US, prices are now actually falling. It was tabled that inflation was at 0.9%, the lowest level since 1966 last month. But as the trend to lower prices continues, the next stop is for prices to fall, and that moment is upon us.

In the UK, the trend is not yet deflationary, but the trend is for inflation to be falling. This goes against many forecasters who are convinced that the falling Pound will cause higher inflation. But however fast the Pound falls, commodities are falling faster. Wages are being squeezed with unemployed people, when they are eventually rehired, finding their pay down by 15%.

The world is readying itself for inflation. When will people realise that the new enemy is in fact deflation? Prices will be falling for a period of maybe years, until people decide that they are buyers once more. Government spending will need to fall 50% not 25% to keep pace with the falling revenues. Capital Gains Tax will have a higher rate soon, but will there be any gains to tax? That is the bigger question.

I spotted this report on a gold website kitco.com which shows how surprised people in the US at being faced with falling prices.

The key U.S. inflation reports – the producer price index and the consumer price index -are slated for release Wednesday and Thursday and are without a doubt a big focus for gold and other traders this week. Both reports are expected to be tame.

May’s producer price index, which measures wholesale inflation, is expected to show a drop in prices. Marketwatch says the consensus is for a 0.6% decline, after April’s 0.1% drop. The core is expected at 0.1%, versus 0.2% in April.

The consumer price index for May is expected to fall 0.2%, Marketwatch says. It fell 0.1% in April. The core, which excludes the volatile food and energy components, is forecast at 0.1% and was flat in April.

Market analysts said the headline figures for PPI and CPI should be down because of the steep drop in oil prices in May and that lowered gasoline and heating oil prices. Further, food prices have fallen a bit, also tempering the main figure. Yet because of this, the core figures might be slightly higher.

Standard Chartered said in a research note that there is little sign that inflation should change. “Industrial production and capacity utilization should show continued improvement but have a long way to go before inflationary pressures become a consideration,” the bank said.

The bank added that not only is inflation in the U.S. and western economies not an issue, so far it is remaining tame in Asia, where economic growth is picking up, although momentum is building. Still, they said, the turmoil in Europe may push back any central bank rate tightening until the end of 2010.

Jim Smitherman, a commodities broker at Coquest Inc., said the attitude in the markets concerning inflation is “steady as she goes.”

He said inflation data is tame and should remain so for the remainder of the year. “I think the Fed will maintain its current policy for the foreseeable future. Commodity prices in general are lower over the last six months and barring a collapse in the dollar I would expect them to remain that way,”Smitherman said. “Those calling for inflation right around the corner have been doing so for 2 years now. How far away is this corner? I think it is a long ways away.”

A year from now Britain could be saying very similar things. Talk of inflation could soon become a distant memory, as debt-deflation takes hold.

The Tap Blog is a collective of like-minded researchers and writers who’ve joined forces to distribute information and voice opinions avoided by the world’s media.
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