Monday, March 10, 2014

Sliding Into Deflation

I'm a big fan of the median consumer price index. It has just been added to the FRED database.

According to research from the Cleveland Fed, the Median CPI provides a better signal of the inflation trend than either the all-items CPI or the CPI excluding food and energy. According to newer research done at the Cleveland Fed, the Median CPI is even better at PCE inflation in the near and longer term than the core PCE.

Let's process the bejesus out of the median consumer price index and see what horrifying thing pops out!

The following chart shows the 6 month moving average of the annualized change in the median consumer price index.

Click to enlarge.

The trend line in blue uses the data starting in August of 2011 and ending in January of 2014. That's 30 monthly data points.

Ten Observations:

1. The blue trend extrapolates backward in time extremely well.
2. We cannot blame this winter's weather on its decline.
3. Hyperinflation theories are being poned yet again.
4. ZIRP is not preventing the decline.
5. QE is not preventing the decline.
6. The inflationary recovery is fizzling.
7. Wrong-Way Siegel's worried about inflation.
8. How many investors believe this trend could happen?
9. How many investors believe it is actually happening?
10. The future's so bright, I gotta wear Japanese shades.

For the first time since starting this blog in 2007, I am changing my long-term inflation mood to neutral (as seen in the upper left hand corner of my blog). Much like Japanese investors since their housing bubble popped in the early 1990s, I am no longer a believer that the consumer price index must rise even over the long-term. I'm not saying it can't. I'm just indifferent now. That's all.

That said, I will continue to hold inflation protected treasuries (TIPS) and I-Bonds to maturity, for the same reason I have fire insurance on my home. I do not expect my house to burn and yet I have fire insurance just the same.

This is not investment advice.

Source Data:
St. Louis Fed: Median Consumer Price Index


mab said...

Check out the commentary from NFIB economist Bill Dunkleberg.

The economy is not doing well and little is happening in Washington that would lead owners to think otherwise. Even the Federal Reserve’s guidance is for a weak economy, that’s what owners read and they are the experts (and policy makers). All policy is focused on the election, pandering to special interests, not the interests of the “middle class” (most of us) which simply wants to see better economic growth and serious job creation (along with improving compensation). Consumer sentiment is equally morose for this stage of a “recovery”. Only 1 in 10 consumers think government policy is good.

Deflation, making sure "it" happens here!

Stagflationary Mark said...


"special interests"

We also have special interest rates. They're on the short bus(t).

Ba-dum ching.