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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.
5 comments:
Scott,
what is the headline axis on the graph today? Is that Headline Inflation including energy and food?
Right, the headline number includes everything.
Putting Polotics aside for a moment. I find it very unwise for the Obama administration to be so aggressive with an issue like this during these difficult times. lets get some breathing room first, and then if we want to cut off our other leg later than great go ahead...
I can't remember where I saw it, but it was a great quote to the effect that "when your housing is burning down you don't go out to water the grass."
And when your neighbor's house is on fire, due to smoking in bed, you don''t go over and have him arrested, you put out the fire first.
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