Tuesday, April 20, 2010

Threat of deflation stalks recovery

David Rosenberg points to this article as he muses about deflation being the primary concern going forward, not inflation. He says that economists are split 50-50, yet the evidence has been in favor of deflation. A few tidbits from this article:

"Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said: “As long as inflation expectations, broadly understood, remain within already established ranges, and actual measured inflation and core inflation remains low, there is no urgency on the part of the Federal Reserve to hike interest rates.”

But while a sustained period of low inflation might be a welcome development, a spell of sharp deflation would be more worrying because it could derail economic growth."

Mr Resler, who says his monetarist roots would have led him to believe inflation would increase, has been particularly focused on wages in US employment reports. In March, wages fell, by the most in 20 years.

“Worries about inflation continue to be very misplaced,” he said. “If the money that has been pumped into the system by the Fed does not flow into transactions, and banks are not lending, it cannot be inflationary.”

“Deflation remains the primary trend, notwithstanding the bounce in commodity prices that surely are going to act as a significant margin squeeze for retailers,” said David Rosenberg, chief economist at Gluskin Sheff.

Nick Beecroft at Saxo Bank think it will emerge as a factor by year-end. “By the fourth quarter of this year, the markets will be gripped by a deflation scare, similar to the one which so pre-occupied us all in 2002/2004,” he said.

Scott Dauenhauer CFP, MSFP, AIF