If it Walks Like Deflation and Talks Like Deflation . . .

We’ve heard a lot lately about “Keynesian Central Planners” (like Milton Friedman, I suppose, of “We are all Keynesians now” fame) using QE-style monetary policy to engineer a “healthy” rate of inflation, usually thought of as in the 1.5%-2.0% range. But the question of “are we inflating or deflating?” is, in our overly-complicated world, not that easy to answer. Let’s look at a few charts (all data are non-seasonally adjusted).

If we believe the Core Consumer Price Index (CPI excluding food and energy) is the correct measure of inflation, we’re inflating:

CPI-ex-Food-and-Energy

If, on the other hand, we think the Producer Price Index for Commodities is the correct measure of inflation, we’re deflating:

PPI-Commodities

And, if we prefer not to have our data averaged, hedonically-indexed and otherwise “adjusted” by government bureaucrats, and dare to look at the actual change in price of key agricultural and physical commodities:

Commodites-Prices

We see that crude oil, copper, soybeans, wheat and corn are in a 2-year bear market, with an average price decline of -29% over the past 2 years! Which is unequivocally deflationary — and more than a little bit scary, given the increasingly-shrill propaganda machine devoted to discrediting those who are forecasting deflation (see Bloomberg’s coverage of Bill Gross, now at Janus Capital).

Forecasting is usually a pretty tough business. But it’s pretty easy to forecast deflation after a deflationary trend is clearly visible in the data over the past 1-2 years.

For me, the key question is, “If quintupling the size of the Federal Reserve’s balance sheet has been necessary to keep commodities’ prices from plunging more than -30%, what would the price trends look like in a completely free market?”

Of course, that’s not to say that QE hasn’t been completely unsuccessful at stimulating any inflation whatsoever:

SP500

If you’re not concerned, you’re either not paying attention — or you’re a money manager.

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