News

A Warning That the Economic Recovery is Threatened by Deflation

People love a bargain.

However, a June 23 article from the Hill titled "Time to act now before deflation destroys the economic recovery" mentions the downside of falling prices.

Here's an excerpt:

The economy has entered a recovery stage from the shutdown ordered by the government to control the spread of the coronavirus. Getting states to fully reopen is the top priority for a fast recovery. But no one seems to be paying attention to another restraint on growth at play across the country, which is deflation, or a steep fall in prices. That is happening even with all the Federal Reserve interventions to provide more dollar liquidity and its pledge to keep interest rates near zero for two more years.

Many Americans might think that if prices fall, everything will cost them less. In reality, deflation tanked the economy in the Great Depression, and it has not worked out that great for Japan in recent times either. Deflation shrinks an economy, slashes business profits, and hurts farmers because crop and dairy prices fall, ranchers because meat prices decrease, drillers because oil prices sag, and jobs because employers pull back.

What is indisputable is that prices have been falling at a dangerous pace. The personal consumption expenditure gauge, which tracks household and individual spending, fell at more than a 5 percent annual rate, as the Consumer Price Index plunged at a 9 percent annual pace in April. The Consumer Price Index decline was faster than for any month since 2008. The core Consumer Price Index, which excludes food and energy, fell for the first time since 1982. Prices continued to fall in May.

Commodity prices, which we have argued are the best daily indicators of monetary conditions, are signaling a convulsive downward price spiral. Despite the recent energy rally, oil prices have fallen by about 25 percent this year. While it reflects a rapid fall in international demand, the global shortage of dollar liquidity is adding to the pain in the energy industry. Almost all commodities have seen major declines in prices.

Speaking of commodities, two of Elliott Wave International's monthly publications -- the Elliott Wave Financial Forecast and The Elliott Wave Theorist -- anticipated lower prices back in 2018. The March 2020 Elliott Wave Financial Forecast reminded subscribers of those forecasts as it showed this chart:

200624 - BobSThis chart shows the Thomson Reuters/CoreCommodity Index; the high on the chart is the end of a bear market rally in May 2018. In February 2018, the Elliott Wave Financial Forecast called for a "substantial decline" in the CRB, and The Elliott Wave Theorist reiterated with a forecast for a resumption of the "Bust in commodity prices" on October 1, 2018. Two days later, the CRB index made the countertrend high shown by the arrow on the chart...

As EWFF suggested last month, it did not take long for the bear market to register in the global economy...