Biggest US monthly price (CPI) decline since at least 1947

A lot of people bash the FedRes but Ben Bernanke has been right on one thing: inflation. His view, which was similar to mine, was that inflation will moderate as the economy slows. Recall that he was going against quite a few who thought that inflation was going to be high (this was when commodities were skyrocketing.) Inflation has certainly declined although I suspect no one expected it to drop this much:

U.S. consumer prices plunged by the steepest amount since records were tabulated in 1947, the Labor Department reported Wednesday.
Prices fell 1% in October on a seasonally adjusted basis, with energy prices plunging fully 8.6%.

Both the overall and energy decreases were the biggest since the government began keeping such records. Data on the overall CPI date back to 1947, and the energy data go back to 1957.

Meanwhile, food prices in October rose 0.3%, the smallest gain since May. Gasoline prices fell a record 14.2% last month. The data on gasoline date back to 1967.

The core consumer price index, which excludes food- and energy-price inputs, eased 0.1%, the first time there's been a decline in the core rate since 1982.

Core inflation rarely drops so we are witnessing a rare scenario. The reason for the big decline in price inflation is due to the drop in commodities, particularly energy. Economists expect the CPI to drop further in November. If the market is right--I have no reason to blindly follow it--deflation will persist for quite a while.

From an investing perspective, anyone that bet on inflation, such as going long commodities, has been absolutely decimated. There was a popular trend early this year of moving into commodities due to the immient rise in inflation. Some of the commodity stocks have dropped more than the financial institutions infected with the Subprime Virus (for example, a leading commodity producer like Rio Tinto (RTP) is down as much as Bank of America (BAC) this year (but if you look at the last 2 or 3 years, RTP would have done well.) Even gold stocks have been killed with the HUI goldbugs index down more than 50% this year (gold bullion is down 10% this year and underperforming cash.)


  1. Well, the dragon Deflation is out of it's lair and stalking the earth. And a mighty beast it is, impervious to any weapon forged by man.

    Still, with the world's goverments woken from their complacent slumber and preparing to use forbidden lore to banish the monster I suspect it will not last long.

  2. I see the possibility of deflation as being quite low but I do have a big concern.

    My concern lies with the possibility of a big deflationary bust in China. This is a real threat in my eyes. It will also be difficult to control this. For instance, if my view that there is massive overcapacity in Chinese manufacturing, among other things, is correct, China is going to dump a lot of goods on the world markets.


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