The great inflation vs deflation debate continues and both sides now have more data to make their case. First up, deflation.
WalMart Price Cuts - WalMart's permagrowth machine has hit a few bumps recently and now they are going to try to lure you in with some loss leaders. Is this deflationary? If you drink Coke it is. However, this is also part of a broader attempt to bring in more shoppers.
Wal-Mart is counting on $1 ketchup bottles and sub-$4 cases of Coke to get its low-price mojo back.
The sharp cuts at its U.S. Walmart stores, which came ahead of Memorial Day weekend, have already pushed rivals such as Target into price wars. And the markdowns are expected to keep coming throughout the summer.
They're one of the boldest moves the world's largest retailer is making to turn around sluggish business at its U.S. namesake chain and win back shoppers from rivals. The cuts aren't across the store but target 22 foods and other essentials at an average savings of 30 percent -- splashy enough to get attention and perhaps change perceptions.
The world's largest retailer is also restoring items like certain soups and laundry detergent it stopped carrying when it tried to declutter its stores. It's also pushing more basic clothing such as socks and underwear after putting too much focus on trendy items that didn't sell.
Krugman the Deflationist- Paul Krugman continues to mock and ridicule anyone who says that inflation might be an issue and that more debt is the only option.
So the OECD wants the Fed to start raising interest rates soon — in the next six months or less — because ... well, we can look at the OECD’s own forecast. According to this forecast, in the fourth quarter of 2011 — a year and a half from now — the unemployment rate will still be 8.4 percent. Meanwhile, inflation will be 1 percent — well below the Fed’s implicit target of 2 percent. My view is that inflation will be lower than that — core inflation is already below 1 percent. But even given the OECD’s forecast, what possible reason would there be to tighten monetary policy now, when the economy will still have vast excess capacity and inflation that’s too low at the end of next year?
The only explanation seems to be at the beginning of that passage: some people, the report claims, are starting to think there might be inflation, so even though they’re wrong according to our forecasts, see, we need to head off this phantom threat and slow the economy’s recovery ... what?
Commodities- Obviously oil has dropped quite a bit in the last few weeks. So have many other commodities. This certainly isn't inflationary.
The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil.
The Journal of Commerce Industrial Price Commodity Smoothed Price Index that tracks the growth rate of steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth
US Real Estate - The thing that started this whole recent mess continues going down. Housing inventory is rising, prices are falling, the tax credit is over and mortgage applications are plummeting.
Certainly plenty there to make the case that we are headed for a bout of global deflation. If this comes to pass it is unlikely to be enjoyable for most people. Now for the inflation side of things.
Emerging markets have rebounded from the latest crisis and are experiencing rapid growth.
India has a fast growing economy and an inflation problem.
In a global economic outlook, released Wednesday afternoon, the Paris-based grouping warned: "With inflation remaining elevated and the recovery appearing to have taken root, there is a risk that price increases for inputs will flow through to second-round increases and that inflationary expectations will become destabilised. To mitigate this risk, sizeable further monetary tightening will be required through 2010 and into 2011."
China has a fast growing economy, a crazy real estate bubble and a looming inflation problem.
China's inflation could top the government's three per cent target in 2010 due to price pressures in the second half of the year, a central
bank adviser said, raising pressure for a possible rate hike.
The consumer price index, the main gauge of inflation, could hit 3.7 per cent this year, said Li Daokui, a member of the People's Bank of China's monetary policy committee, according to the People's Daily overseas edition on Wednesday.
With our economic fortune so closely tied to China, their inflation problem could become our inflation problem (similarly, their economic crash could drive down commodity prices and contribute to deflation). Right now the US does not have a strong economy, unemployment remains historically high and most government inflation measures show little concern about inflation. And therefore the big banks will get to continue to benefit from the Fed's zero percent loans. A lot of people argue that you can't have inflation with high unemployment. There are two reasons why this isn't a strong argument. First up, see England and Spain.
Spain's unemployment is around 20%. And while they don't have high inflation, prices have been going up for the last 7 months.
The advanced data for the rate of inflation in Spain for the month of May shows that prices in the country rose for the seventh successive month.
The Index of Harmonized Consumer Prices (IPCA) published by the Spanish National Institute of Statistics (INE) Friday shows that prices rose by 0.2 percent in May to leave inflation at a rate of 1.8 percent.
It is the seventh successive rise in the country after eight months of continually falling prices.
England's unemployment is at a 16 year high and yet they have rising inflation and, once again, fast rising real estate prices.
a report by the Land Registry showed home prices in the U.K. rose at an annualized pace of 8.5% in April to mark the fastest pace of growth since September 2007, while a separate report showed manufacturing expanded at the highest level in over 15 years as PMI reading held steady at 58.0 for the second consecutive month in May
And in the 1970s in the US we had inflation and high unemployment (stagflation). The assumption the Fed is making is that they need to keep rates low until the US returns to full employment. Full employment is understood to be 5% unemployment. With unemployment now hovering around 10% they have an easy argument for keeping rates low. However, there is a good argument to be made that things have fundamentally changed in the US economy with all the wonders of globalization. Where are the jobs going to come from that will return unemployment to 5%? Certainly not from construction where a lot of the job losses have occured. Some people are making the argument that the new normal for full employment may be 7-7.5% unemployment. Of course this means if the Fed keep rates at zero waiting for 5% employment, we could be in for some easy money inflation trouble.
On a "cheerful day" Phelps said he estimates the rate, or NAIRU, has climbed to between 6.5 percent and 7 percent. On a "gloomy day," he pegs it from 7 percent to 7.5 percent.
"If you knew for sure that the natural rate was 5 percent, then it might make sense for the unemployment rate to hit 7 or 7.5 percent before you start tightening at all," Maki, 45, said in an interview from his New York office. "That becomes a very risky strategy when the natural rate has risen, because you could be sitting at a zero percent Fed funds rate at full employment and not realize it."
Has the natural rate risen or should we assume globalization has changed nothing? We'll know soon enough.
One final note. In April Canada started to get some higher inflation readings. The Central Bank said not to worryand that it was most likely due to the Olympics. Fast forward to June and they have just raised their rates. Obviously our neighbors to the north have some inflation concerns.