November 20, 2010

The Deflation Myth

This week’s US inflation data were something else.  Core CPI increased only 0.6% on an annual basis, the slowest on record.  These kind of numbers give ample justification for the planned $600 billion treasury purchases by the Fed (QE2). But there is still this nagging question as to what type of inflation numbers we are looking at.  Regular readers of FXIS Market Insights know that your humble commentator is typically more concerned with inflation rather than deflation.  We have discussed our views in numerous articles, most recently in Inflation vs. Deflation, Market Insights 3 April 2010 and How much further for Gold? 

The debate on inflation won’t go away, not with QE2 and not with whatever the Fed will pull out next from its tool box. Speaking of tools, I’d like to refer to an excellent article by John Mauldin: O Deflation, Where is Thy Sting? 

John Mauldin explains his views on inflation and the (lack of) tools in the Fed’s bag of tricks when he surmises:

I wonder if the Fed is not trying to fix a modern 2010 economy with tools made in the ’50s, based on theories based in the writings of a bunch of dead white guys. They were smart guys, I give you that. But times have changed. And our measurement tools seem flawed to me.

Enjoy this very illuminating article and have a wonderful week-end!

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