Expert Commentary

Are You Ready for Another Deflation Scare?

At the start of 2021, everyone is worried about consumer price inflation. But could that be about to reverse?

Money supply is exploding, commodity prices have risen dramatically, and the pandemic-induced lockdowns mean that supply chains are tight with consumers having pent-up demand waiting to be unleashed. Those are the arguments given by people who foresee increasingly rapid price inflation over the course of 2021 and beyond.

The arguments sound compelling and we certainly cannot ignore the fact that commodity markets might have established a significant low in April 2020. However, prices do not tend to trend in a straight line, at least initially. Rather, certainly with regard to commodity prices, they tend to follow an Elliott wave progression with corrective declines part of the natural process of an advance. Perhaps the chart below is hinting that such a decline might be upon us.

We last showed this chart of U.S. Price Inflation Expectations back in November, highlighting the triangle pattern that had been traced out, and we stated at the time that:

“…there should be an upward thrust in price inflation expectations in coming weeks."

This turned out to be correct, which increases confidence in our other conclusion we stated in November:

“…once that thrust is complete, a reversal should occur, putting downward pressure on consumer price expectations. If this triangle is a fourth wave, and the thrust higher is therefore a fifth, the subsequent reversal could be extremely deep, perhaps even down towards the low of 0.50% reached in March of this year.”

Currently hovering around 2.06%, this measure of U.S. Price Inflation Expectations is coming up against the previous high of 2.17% reached in 2018, and so it would be a neat place for the fifth wave to end. A drop below 1.96%, however, is required before we can increase the probability that a significant top in price inflation expectations has been reached.

US Price Inflation Expectations JAN2021