Inflation is Deflating

  • Market Commentary

With only three FOMC meetings left this year, professionals and consumers patiently await to hear how the Fed will approach the current signs of an "improving" economy. Most recent economic data shows that America's jobless rate has fallen nearly a percentage point over the last year, home construction has accelerated and the equity markets continue to rally on the slightest positive news. However, do these recent improvements portray a healthy growing economy? The current pace of inflation, tells a slightly different story.    

With the rate of inflation cooling off recently, Fed Chairman Ben Bernanke acknowledges the risk that it might have on the economy and mentions that inflation would have to rise before the Fed could end its bond-buying program and for the economy to grow. Bernanke, personally points to recent temporary factors, such as federal budget cuts, to the cooling off of inflation. Remaining divided, the Fed continues to squander over why inflation has been persistently below its 2 percent target. Minutes from the central bank's July meeting (July 30-31) show that a number of policymakers believe that persistent economic weakness is the reason behind the current low level of inflation, rather than temporary factors. Many economist are surprised inflation is not even lower, given that the unemployment rate has been above 7 percent for more than four years. In short, current US inflation may damage the Fed's plan to end a bond-buying stimulus by the middle/late next year and could leave the economy in a stalemate.

Directly pointing to a commodity that has hasn't experienced inflation, but rather deflation is the Corn market.  Please refer to the Corn chart below and notice how the price of Corn peaked at $7.00 a bushel back in July 2012 and is now $4.60, losing nearly 35% of its value in less than one year.

We would like to point out that the deflation that was experienced in the Corn market, could be good deflation because it ultimately lowers food costs for consumers making things more affordable.

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