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Threatening Deflation May Be New Fed Problem

  • Written by Syndicated Publisher No Comments Comments
    December 4, 2013

    The fears of the last 12 years or so that the Fed’s unusual easy money policies would create runaway inflation have not materialized.

    Instead inflation has remained under control, and has now begun declining toward deflation.

    The Fed has indicated all along that it would like to see some inflation to help the economy. More recently it said it will keep interest rates low until either unemployment drops below 6.5% or inflation rises significantly above 2 % annually again.

    Instead, inflation is plunging, running at a 1.0% annual rate through the 12 months ended October 31, 2013, down from 2% in July. The graph below shows the annual rate at the end of each month since January, 2012.

    United States Inflation Rate

    The next release will be as of the end of November. Unless there is a surprise, the annual rate will likely fall below 1.0%, since CPI was -0.2% lower August through September, and -0.1% lower from September through October, still trending down, and as noted, at such a pace that concerns are rapidly shifting from the potential for inflation to the potential for deflation.

    Deflation occurs when the rate of inflation drops below zero percent. The result of deflation is an increase in the real value of money (cash) relative to goods and services. A threat of deflation is negative for stocks. When deflation is a threat, and prices are falling, consumers tend to curb their spending waiting for falling prices to bottom. Unfortunately, that leads to less production at factories, less investment and a so-called deflationary spiral.

    The normal fix is for the Fed to cut interest rates so consumers will be less willing to hold cash, and will be enticed to spend more, creating a more inflationary situation.

    But with the Fed having already cut the Fed Funds rate to near zero, and having provided massive QE easy money policies, it does raise the question of what has it got left if inflation continues to fade away and deflation threatens.

    Gold, the age-old hedge against inflation, seems to have foreseen that deflation rather than inflation would become  problem, with its 35% bear market since mid-2011.



    To read my weekend newspaper column click here: Market Seasonality and the Fed Are a Powerful Combination

    Subscribers to Street Smart Report: There is an important ‘Gold, Bonds, Dollar, Inflation/Deflation’ Report on the website from yesterday.

    In addition to the charts and commentary in the secure area of this blog this morning, the next issue of the newsletter will be out tomorrow in your secure area of Street Smart Report.com 

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more.