Here comes US de­fla­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

The red line denotes the US pro­ducer price in­dex (exser­vices), which leads the US con­sumer price in­dex (exshel­ter) by one month (blue line) with a cor­re­la­tion of 93.8. Wed­nes­day will see the US CPI re­lease for April with con­sen­sus ex­pec­ta­tions point­ing to a core read­ing of 2.1%, down from 2.2% in March. I would sim­ply note the fol­low­ing:

1) In each US re­ces­sion since 1955 the CPI has peaked dur­ing the con­trac­tionary part of the cy­cle and started to fall once the econ­omy re­ally be­gan to hit the skids.

2) Since 1955, each time that “fi­nal do­mes­tic sales” growth — from the GDP re­port — fell be­low 2% a year, both the CPI and the PPI de­clined and kept fall­ing un­til the 2% thresh­old was again ex­ceeded.

3) If US growth in 2Q16 proves as weak as in­di­cated by re­cent data, then the ef­fect of a strong 2Q15 com­para­tor will cause the an­nual growth rate of fi­nal do­mes­tic sales to fall be­low 2% (they are now 2.29%).

4) In such an even­tu­al­ity, both PPI and CPI would likely start to de­cline.

5) Both the CPI (ex-shel­ter) and PPI (ex-ser­vices) have re­cently recorded year-on-year falls. Look­ing for­ward, de­clines in both in­dices will prob­a­bly in­ten­sify with quite a few prices see­ing out­right de­clines.

It must, of course, be ac­cepted that the un­ad­justed CPI and Per­sonal Con­sump­tion Ex­pen­di­ture price in­dexes re­main in pos­i­tive ter­ri­tory. My point is that this is due to the cost of shel­ter be­ing driven up by asi­nine pol­icy re­sponses, and also the im­pact on health costs from “Oba­macare”.

Push­ing up the price of shel­ter and health in­sur­ance can be thought of as a tax rise as the im­pact is to re­duce dis­pos­able in­come for the av­er­age con­sumer. The ef­fect will be to apply down­ward pres­sure on all other prices and con­se­quently on the prof­its of com­pa­nies op­er­at­ing in th­ese mar­kets. Seen in th­ese terms, is it any great won­der that US long bond rates are de­clin­ing? In my view they will keep fall­ing.

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