Deflation Watch (May 2010): Headline Deflation Is Back!

April and May brought a renewed decline in the headline consumer price index, however it is not yet clear whether this trend is ready to stick. And curiously (and a little unexpectedly) rents seem to have stopped falling, at least for now.

Some Relevant Current Articles

• Have Residential Rents bottomed? - Calculated Risk says "There is some evidence that apartment rents have bottomed ... at least temporarily." And from the BLS: "The indexes for both rent and owners' equivalent rent were unchanged in May."

• Warren Mosler on oil prices (from March, but still relevant to the medium term trend):
  

"With supply following demand, as with any monopolistic arena, it looks like the world crude oil balance remains very much neutral leaving the Saudis in full control as swing producer where they set prices and let quantity adjust to market demand. Stable crude prices with 0 interest rates, high excess capacity and low aggregate demand should keep inflation at bay indefinitely, with productivity increases making deflation the greater risk."

Consumer Price Index Trends: Great Depression versus Today through May 2010 (US)

(click on chart for a larger version in a new window)

I should note that this chart isn't intended to show we are following the Great Depression path, as we are clearly not (more details in the original deflation post), so perhaps a new chart is in order in the future.

However, it is looking like the headline CPI (red line) has been changing direction and may not make it back to the peak level from July 2008!

Annualized 3-Month Rate of Change for Components of US Consumer Price Index, Seasonally Adjusted (April 2006 - May 2010)

(click on chart for a larger version in a new window)

The three month trend in CPI has gone negative for the first time since late 2008! However, transportation (dominated by energy prices) at -6.9% (annualized three month rate) and apparel at -3.6% (annualized three month rate) seem to be the primary drivers of the latest deflation. Housing (and its subset category, shelter) seem to have stopped declining, at least in recent months. The other components are all in positive (but sub 3%) inflation territory, with varying levels of volatility. Will we stay in negative price change territory? It seems likely the drag from energy prices will come to an end, so the answer is far from certain in the short term, though the overall dis-inflationary trend is nowhere near over.

Price Index Changes: Great Depression CPI versus Current PPI through January 2010 (US)

(click on chart for a larger version in a new window)

Slowing in China, austerity in Europe, and the peaking of housing bubbles in countries such as Australia, Canada, and the UK could all contribute to a sustained end to rising commodity prices.

16% Trimmed CPI

The 16% trimmed mean CPI (generated from the Cleveland Fed site) removes the most extreme monthly price changes, and is still falling after only a brief interruption in the trend:

(click on chart for a larger version in a new window)

CPI in Japan (Jan 1980 - Jul 2009)

From previous posts, for reference: "The peak of Japan's CPI occurred in October 1998, almost eight years after the stock market peaked, and Japan's notorious mild deflation has been in effect since then. A multi-year disinflation (of core CPI) leading to sustained mild deflation is one possible outcome for the US.

(click on chart for a larger version in a new window)