I now realize that oil prices were temporarily too high due to speculators. OPEC has been at max capacity for a few years, and will keep pumping at that high capacity, even though there is an oil surplus now. I do think we are at peak oil, but I just can’t explain the volatility of oil. Now I understand why the oil and food prices are not in core CPI; they are very volatile. Chevron’s find is a drop in the bucket, and if it had any effect on oil prices it would be psychological only. Oil sands have been around but are expensive to pump, so oil must be at $70/barrel or higher (I think) before it is cost effective to extract oil.
Perhaps commodities are dropping due to changes in pricing by speculators. Are they forward looking, seeing the global slowdown?
The Fed tried to slow the economy by raising interest rates, and it is starting to work. So what is the difference between a slowing economy and deflation? Aren’t energy and commodity prices, which are volatile anyway, supposed to drop when the economy slows?
When rent, health care, tuition, and groceries drop in price, then I will believe deflation is here. If we truly had deflation, the CPI would be negative.
Mish is convinced of deflation, and Eric Janszen of iTulip.com talks about the kaPoom theory: high inflation followed by deflation.
