Friday, May 07, 2010

When Will Helicopter Ben Spin Again? Deflation Looms.

Bloomberg has an article out talking about the possibility of deflation and how Bernanke will deal with it. The article notes:

The Fed’s preferred inflation gauge -- the core personal consumption expenditures price index, which strips out food and energy -- rose at an annual rate of 0.6 percent in the first quarter, the slowest pace since records began in 1959, according to an April 30 Commerce Department report.

Bentonville, Arkansas-based Wal-Mart Stores Inc. cut prices on more than 10,000 items after sales at U.S. stores opened at least a year fell 1.6 percent in the quarter ended Jan. 31, the world’s largest retailer said April 9, adding it plans more reductions.

Home Depot Inc., the largest U.S. home-improvement retailer, lowered prices in March on flowers, fertilizers, lawn equipment and outdoor furniture to help meet its goal of increasing annual sales for the first time in five years.

“We are looking to continue to drive our traffic in the stores,” Craig Menear, executive vice president of merchandising for the Atlanta-based company, said in a March 17 telephone interview. “Things are still difficult out there for customers.”

So what does this mean for policy? Continued low rates and bubble blowing.

The Bloomberg articles goes on to say:

Money supply also points to declining inflation. The broadest measure compiled by the Fed, known as M2, expanded at a 1.5 percent annual rate in March, down from a 9.2 percent rate a year earlier.

“Central banks ignore money at their own peril,” said Gabriel Stein, a director at Lombard Street Research in London. “One of the key signals of threatening deflation is if money supply grows very slowly or in fact contracts.”

Even so, there are signs of life in the economy. The U.S. expanded at a 3.2 percent annual rate in the first quarter following a 5.6 percent pace in the fourth quarter of 2009, the strongest back-to-back performance since the second half of 2003. Employers added 290,000 workers to their payrolls in April, the fourth consecutive gain and the largest since March 2006, according to the Labor Department.

“We’re seeing very soft price pressures right now, but the fact that the economy is expanding at an above-trend pace means we’re going to see price pressures eventually start to turn up as recovery becomes expansion,” said Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities Inc. in New York. He predicts the Fed will begin raising rates in August.

Be very careful out there folks, risk is still alive and lurking.

Scott Dauenhauer CFP, MSFP, AIF
Meridian Wealth Management