Friday, July 16, 2010

Inflation Pressures Fading

This week’s barrage of economic data included several updates on the inflation front. Separate reports on import prices, producer prices, and consumer prices were all released. Import prices and producer prices came in below expectations, while consumer prices matched expectations by declining a little from the prior month. The current message from the latest round of data seems to be that inflation pressures that briefly sprung up earlier this year are rapidly fading.

The bigger issue, of course, is which of the two forces, inflation or deflation, is more likely going forward, since they have very different invesment implications. There continues to be a hotly contested debate in the market place about that right now. We continue to believe that both camps make valid arguments, and there’s a possibility that both may be right. The issue for us has to do with timeframes.

With the economy clearly showing signs of slowing recently, and still dealing with the aftermath of the deep 2007-08 downturn, we tend to lean toward the disinflation/deflation camp in the near-term. However, we also believe that inflation may eventually appear as an eventual side effect of the ultra-easy policies that policy makers have pursued for the last year and a half.

Chart: CPI year-over-year % change (blue) and PPI year-over-year % change (red)