Where Is The Deflation? The Same Is True For Inflation

Inflation is one of the most misunderstood topics. When people talk about it, we see ideology and a lack of clarity as to what is taking place. Certainly, the last few years were tough. However, the media plays things up for clicks/viewers. This, of course, spreads fear throughout the online community.

The reality is we are moving closer to a full blown deflationary spiral. So when people ask it, we see it in front of us. No, our future is no hyperinflation. That is something espoused for 30 years.

One thing we do have to mention is that consumer prices are only one part of the equation. There are other factors in this such as labor. The inflation bad/deflation good seems to overlook this point. In a deflationary environment, job losses accelerate. So to believe that deflation is a good thing is not the case.

That said, let us take a look at oil. Why are we looking at that when energy is not part of the inflation indexes? The reason is, for the past few years, people pointed to it as part of the narrative. Well, it is works going up, it has to apply on the down.

Also, oil is the most used commodity. The tentacles of this market are huge. For this reason, let us look at oil prices to see what is happening.

Here is the 6 month chart:

Notice how we are at the lower end of the spectrum. This is during a time when OPEC cut production and, just the other day, the Saudis did a follow up. Yet, after pushing higher to start, the price dropped back to where it was on Friday.

Why would the Saudis be cutting prices if things were rosy and we were going to see explosive prices? The answer is they wouldn't.

Nevertheless, we cannot put much stock in a 6 month chart.

How about the 1 year?

Once again, a big drop from a year ago.

How about the 5 years?

Well that looks a bit nasty. However, we have to note that the prices now are at the level where they were in 2018. So 5 years and they are flat (albeit with a lot of movement).

Perhaps we need to step our further:

Higher than we were during much of the last decade but still below where we were 10 years ago. Another time period that was ultimately flat.

One final step back:

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Here we see tow things. We are below the 2010-2014 time period. At this level, we are back where we were in 2006. Let that sink in. A barrel of oil is the same price as it was in 2006.

This is not some side commodity that few even know about. We are dealing with the largest commodity in the world. Oil is central to most of our economy.

Also, this is not some manipulated stats. This is the pricing from the one of the most heavily traded commodity markets.

The Saudis Are Looking Ahead

I have been very harsh on the Fed. The reason is they are using metrics that are worthless in this forecast. Unemployment is a backward looking indicator. What is forward looking is oil. The Saudis see what is taking place. Demand is waning. That means lower price unless they can restrict the supply. Even this is not going to work.

Another forward looking indicator is new orders. When factories have plenty of new orders, that means they will hire more people, buy more materials, and produce more over time. This is not what we are seeing.

The ISM survey's forward-looking new orders sub-index dropped to 42.6 last month from 45.7 in April.

Source

For those who do not know how this works, 50 is considered flat (or neutral). If the index is above 50, it means expansion. Obviously, the more above it, the greater the expansion. The opposite is also true.

Hence, going from 45.7 to 42.6 shows major contraction. That means factories are going to have less output in the future. The overall index suffered its 7th straight month in contraction, the longest stretch since the Great Recession.

Be Careful What You Wish For

The switch to deflation can happen rather quickly. New orders down; Saudis cutting. These are not inflationary moves.

Indicators are, if things progress the way they are, we are in for a deflationary move. While some might applaud that, it will come at the expense of jobs. The Fed, naturally, will be blamed yet this is something I have written about for over a year. It starts about 18 months ago with the inventory numbers. This showed the mainstream was full of it.

There is one caveat that could change all this. That is war. If that escalates, we could be in for a rough time as that traditionally is an inflationary event.

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