This Week's Forecasts & Trends E-Letter
The World Is Looking More & More Deflationary
November 24, 2015
While the Fed continues to tell us that US inflation will return to its 2% target before long, the truth is that inflation is trending lower both in the US and in many parts of the world. In fact, consumer price inflation is barely above zero at 0.2% in the US, Germany, France, Italy and Japan. Whereas Spain, Switzerland, Sweden, Singapore, Poland, Finland and others are experiencing deflation.
Deflation is defined as a general decline in prices, which sometimes is due to new technologies or innovations that cause prices to fall. More often, however, deflation is caused by a reduction in the supply of money or credit, or by a decrease in government, consumer or business spending and investment. While declining prices may sound like a good thing, deflation can lead to a recession or depression. That's what we will focus on today.
Along this same line, commodities prices have been tanking since April of last year. While the collapse in oil and gasoline prices has been the main influence over the last year and a half, most other commodities have taken a beating as well. This deflationary trend does not bode well for the economy.
The minutes from the Fed’s latest policy meeting in October were released last Wednesday and made it clear that a majority of the Fed Open Market Committee members favor raising the Fed Funds rate for the first time in almost a decade at the next meeting on December 15-16. Apparently Fed officials believe they should raise interest rates despite the growing trend of deflation. This makes no sense, of course, but what else is new.
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