Chart of the day: U.S. Consumer Price Index

I recently wrote a post about U.S. Treasury securities which have been rising in price as interest rates have come down. In the post, I called the Treasury rise a bubble and I stick by that moniker despite protests from some astute readers.

However, I do want to point out one reason why Treasurys are rising. Inflation.

Non-Seasonally Adjusted CPI
Non-Seasonally Adjusted CPI

Inflation is plummeting and that means inflation will soon become deflation. The U.S. Consumer Price Index (CPI) was released today, showing that inflation fell 1.9% in the last month alone. Prices are only 1.1% higher than last year at this time. In July that figure was 5.6%.

To be sure, much of that decline comes from the drop in oil prices – the energy index fell 17% in November. Nevertheless, this inflation report is a clear signal that prices are plummeting and that the Federal Reserve has been powerless to stop the fall.

Certainly, this is a very good reason why Treasury prices are rising.

Consumer Price Index Summary – Bureau of Labor Statistics

  1. Stevie b. says

    Ed – If the bond market is a bubble – and I agree with you that it is – then we don’t really know how big it can get, especially if the Fed blows into it by manipulating longer-term rates. The tradition of markets – in this case the bond market – reflecting the future is of course destroyed by this manoeuvre. If we look at the prospects for inflation, the bond market is therefore no longer the bellweather for the future if it is being manipulated. The dollar however cannot be so easily manipulated. Do you think this may be where the inflation/deflation tussle will be played out?

    1. Edward Harrison says

      @Stevie b., your point is very well taken. Manipulating interest rates will distort the feedback we get from the markets. They will cease to act as an effective signalling mechanism.

      And, as for the dollar, I’d have to agree that the Fed is much more limited in its influence over currency markets. This is why I expect the dollar t be a weak currency. The Fed can try to reflate all it wants, ultimately that is going to be bearish for the dollar.

      Very good points, Steve

  2. Stevie b. says

    Ed – of course the problem is that all the other major economies are going to go down the same route sooner or later, so theoretically all currencies will be “weak”, so what does that leave us with – gold? The problem is that the Central Banks can manipulate that too, so where does that leave us…?

    1. Edward Harrison says

      @Stevie b., sounds like it leaves us with a repeat of the 1930s, doesn’t it? I mean we are potentially going to see competitive currency devaluations. The Chinese have tried weakening their currency. The Swiss are near ZIRP. The BoE may be next.

      It makes gold look attractive irrespective of deflation. Watch the propaganda video on inflation explained. It tells a picture where gold should be higher in a few years (not necessarily now).

      But it does seem that the ECB will be dragged kicking and screaming to the party.

Comments are closed.

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