Wednesday, March 18, 2009
As with yesterday's PPI announcement, the thing to focus on here is core inflation, which is not falling. Strip out food and energy prices, and you find that prices in general are still rising (0.2% in February) despite one of the sharpest declines in demand in decades. Fears that weak demand would lead to a generalized deflation, with falling prices further depressing demand, etc., are proving to be unfounded. Deflation happens only if the Fed is too tight, and it is pretty difficult to argue that they are too tight.
This may explain why, in the past week, equity prices have risen while the dollar has fallen. With the growing realization that deflation is not happening as so many said it would, the market begins to realize that the outlook for the economy is improving—which pushes equity prices higher—while bets that deflation will push the dollar higher are losing, and thus being unwound.
Last night we were out with some friends until almost 2am, and when we came back to the hotel (we're in Tucumán now, which is in the northwest part of Argentina) there were still plenty of people at cafes. Everyone's worried about the U.S., and they are suffering from depressed commodity prices (Tucumán is a major producer and exporter of citrus products), but life goes on as usual.
Posted by Scott Grannis at 7:55 AM