Not only is there a complete
absence of inflation in most major inflation barometers, but deflation is still
a problem in some quarters.
We’ve
already seen that several major commodities are under intense selling pressure,
including agricultural commodities like corn and wheat. This is all the more amazing when you
consider that crop conditions are less than ideal in many parts of the country
and ag prices should be rising if the fundamental factors are to be believed. Instead we see plunging prices for several
major commodities along with a worrisome trend in China’s producer price index.
Economist Ed Yardeni points out that China’s monetary and fiscal stimulus has, ironically, produced the unintended result of excess capacity. “The result,” he writes, “has been deflation in China’s various PPI measures.” China’s overall PPI fell 1.1% year-over-year during the latest reporting period. The decline was precipitated by an 11% drop in the coal industry, a 6.5% drop in ferrous metals and a 5% decline in chemicals.
With the world’s number two
economy experiencing such deflationary currents, it’s no wonder that global
growth has been lackluster in recent years.
If the Kress Cycle theory is a reliable guide, this trend should reverse
starting in 2015 or shortly thereafter as deflation gives way to
re-inflation.
The pathway to re-inflation is
likely to be a gradual one. There are
two potential scenarios which could cause inflation to become a problem much
sooner, though. One is an outbreak of
major war. Normally it takes at least
10-15 years after the bottom of the 120-year Kress cycle before inflation becomes
firmly entrenched in the economy. But
following the 120-year cycle bottom of 1774, inflation was a major problem in
the colonies during the U.S. Revolutionary war in 1777-79. At that time a pound of butter cost $12 a
pound while flour fetched nearly $1,600 per barrel in Revolutionary Massachusetts. Keep in mind this was only 3-5 years after
the long-term Kress cycle bottomed.
In his commentary of Benjamin
Graham’s classic book, The Intelligent Investor,
Jason Zweig observed that inflation was also a major problem during the U.S.
Civil War. During the war years in the
early-to-mid 1860s, “inflation raged at annual rates of 29% (in the North) and nearly
200% (in the Confederacy),” he writes.
He also points out that immediately following World War II, inflation
hit 18.1% in the U.S.
The other possible scenario for a
rapid re-inflation in the next couple of years would be if the world suddenly
became smaller, i.e., if China and the other major components of the global
economy inexplicably decided to withdraw and restrict imports and exports. If this ever happened it would reverse the
trend toward excess capacity and would eventually lead to the classic
inflationary problem of “too much money chasing too few goods.” It should be emphasized, however, that this
scenario is a major outlier and not at all likely to occur.
The most important lesson to take
away from this is that the deflationary undercurrent is still very much alive
and appears to be accelerating as we head closer to the long-term Kress cycle
bottom this fall.
