Expert Commentary

Deflation or Stagflation? Read this...

Many are convinced that consumer prices will rise. This chart says, probably not for a while yet.

There’s increasing talk about the prospect of stagflation - a situation of stagnant economic growth accompanied with high consumer price inflation, the iconic memory being the 1970s. The argument is that the economic shock to the demand side via loss of income and output as well as structurally higher unemployment will mean stagnant economic growth leading to fewer goods and services. In addition, the unprecedented level of money creation means that there will inevitably be a classic case of “too much money chasing too few goods” and that will lead to higher consumer prices.

In an article for Mises.org, the Head of Research at Goldmoney argues that:

“Distribution of state money will increasingly be in the form of welfare to the unemployed, skewing spending toward life’s essentials. Inevitably, in an economy with subdued activity not responding quickly enough to produce the volumes of products desired, prices, mainly of essential items, will increase sharply.”

In other words, food and energy prices will zoom higher. For that reason, the article argues, people looking at measurements of consumer prices that strip out food and energy will be late to realize what is going on.

This seems like a plausible argument, but it hinges on the newly counterfeited central bank money getting into the hands of the public in the first place. That’s not obvious, given the precedent of previous Quantitative Easing, whereby the money simply stayed in financial markets and added fuel for the positive social mood that was propelling asset prices. Large fiscal transfers (governments doling out money directly to the public) could mean that it is different this time, but it’s far from certain. What is certain, though, is market pricing.

One of the best real-time gauges of price inflation is the Commodities Research Bureau (CRB) index, comprising prices of a broad range of commodities such as food and energy. Having peaked all the way back in 2008, the Elliott Wave analysis still suggests that the bear market has further to run before a major low is found. Indeed, Elliott channeling suggests that the ultimate low could involve another halving of the index from current levels. Nevertheless, we can’t rule out the possibility that commodities have already bottomed. We will be able to state that if, and only if, the CRB index advances above 167.38. Should that happen, stagflation will probably be underway. Until then, price deflation still seems likely.

CRB Index