Expert Commentary

Deflation Trend - We Can’t Ignore This

Much is being made of a sentiment indicator with regard to consumer prices. But does it alter the threat of deflation?

Last month, one of Bloomberg Businessweek's covers featured an image of a deflated T-Rex toy with the headline, "Is Inflation Dead?" Typical with the zeitgeist of the past fifty years, the "inflation" referred to is the increase in the consumer price index (CPI), rather than the proper definition of inflation, which is an increase in money and credit. The article notes that almost everywhere you look around the major economies in the world, consumer price rises have been remarkably subdued.

A number of commentators, familiar with Paul Macrae Montgomery's contrarian magazine cover analysis, have been quick to point out the similarity in the headline to the iconic Businessweek headline of August 1979, "The Death of Equities." That cover coincided with the end of an equity bear market and the start of the biggest bull-run in history. The inference is that this cover will mark the end of subdued consumer prices and the start of a period of higher price "inflation." But will it?

Certainly, the optics of the chart below are striking. Another magazine cover from four decades ago came from Newsweek in March 1980, with the question, "Is Inflation Out of Control?" and featured an image of a burning dollar bill. That's when U.S. consumer prices were rising at an annual rate of 14.6%. March 1980 turned out to be the exact top of the annual rate-of-change in consumer prices, with the CPI index then entering a multi-decade trend of ever-slower growth, actually declining in 2009 and briefly in 2015. Using this cover, the mirror image is very hard to ignore and so we wouldn't be doing our job properly if we did not take this as a clue which could point to higher rates of growth in CPI ahead.

But think of this. The magazine covers from 40 years ago represented a very bearish sentiment towards asset prices and the stock market in particular. "Inflation" in the form of higher rates-of-change in the CPI was seen as extremely bad for the stock market. Taking that logic then, should a sentiment declaring inflation to be dead, AFTER the stock market has risen by more than 3,000%, not be taken the other way? In other words, when the multi-decade, slowing rate-of-change in CPI has coincided with one of the biggest asset-price, and particularly debt, bubbles in history, if CPI starts to ramp up now, perhaps that will coincide with a torrid time for the stock market and asset prices. Indeed, the Bloomberg Businessweek article suggests that it was "the capitalists who killed inflation," pointing to the tremendous era of globalization that has helped fuel the slow rates of growth in CPI. That era of globalization, of course, has coincided with decades of rising prosperity in developed nations such as the U.S.A.

So whilst we acknowledge the potential significance of this magazine cover declaring price "inflation" to be dead, we don't think that higher growth rates in consumer prices (should they even come about) are necessarily a good thing for the economy. If asset prices crumble, as our Elliott wave analysis suggests they will, debtors will be in dire straits and debt-deflation is a probable result.

190509 MG