“Deflationary Forces” Are Gathering Steam

The topic of inflation is top of mind with many people.

A July 8 headline on the website of the World Economic Forum says:

Inflation is the world’s biggest worry, according to a new poll

Yet, be aware that signs of a developing deflation are evident.

Here’s just one example (Washington Examiner, July 5):

Commodity prices drop in sign that inflation may be peaking

Here’s what Elliott Wave International’s thrice weekly U.S. Short Term Update had to say on July 7:

Investors are rightly concerned about the performance of the stock market, where the DJIA is down 20% from its January 5 peak to June 17, the S&P 500 is down 25% from its January 4 peak to June 17 and the NASDAQ 100 index has declined 34% from its November 22, 2021 peak to June 16. But perhaps an equally important story is being conveyed by the behavior in industrial and precious metals, where the declines since March 7 have been substantial. In just this four month span, Copper, the metal with the supposed Ph.D., is down 30%, zinc has fallen 40% and aluminum has declined 42%. … [G]old is down 16% since its March 8 high, while silver is down 30% over the same period. Platinum is also down 30% over roughly the same period and Palladium has declined 49%.

The March 14, 2008 issue of The Elliott Wave Theorist presented a detailed study demonstrating that gold prices have tended to perform far better during economic expansions than during contractions, opposite the widely accepted belief that gold and silver soar when financial turmoil hits. While some pundits argue that the economy is strong and that the U.S. will avoid a recession, the metals, both precious and industrials, are signaling the opposite: the economy is weakening. Recall that first quarter U.S. GDP, which was originally reported as minus 1.5%, was revised downward last week to an annual pace of minus 1.6%. The decline in the metals, as well as the stock market, suggest the headline numbers will eventually get worse. Additionally, commodity prices such as grains are deteriorating. Soybeans have declined 26% over the prior 24 trading days, Corn has declined 31% over the past 45 trading days and wheat is down 42% over the past 82 trading days. Crude oil has also declined 27% since peaking on March 7. Add these large percentage selloffs to the 2/10 U.S. Treasury yield curve, which inverted yesterday for the second time since early April, and the ingredients are all there for an economy that is contracting. … Deflationary forces are intensifying. [emphasis added]