Here’s a riddle: if you hold a bond paying 3% in an economy experiencing 10% annual deflation, what rate are you “earning” on your bond?
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It is interesting that the business press is now focused on total CPI (including food & energy), whereas when total CPI appeared to be out of control the business press focused on core CPI.
In the current report the core CPI hardly changed.
The changes in total CPI over the past 2 years have been exaggerated on the upside when energy costs inflated and exaggerated to the downside now that energy prices have deflated. This effect is why the core CPI was invented in the first place.
If energy deflation makes its way eventually into core prices, then deflation becomes a major issue. There is definitely potential for this to happen. But in my opinion we have yet to see it and I believe that even in the short run (1-2 years) term there is still a tight race between Government printing presses and the impact of recession/declining energy prices on overall inflation (or deflation). With the money supply up by an annualized 36% or so over the three months my bet is on inflation.
