Mish shows us why we're in deflation right now.

[GliderGuider]

Humpty Dumpty On Inflation

Base Money Supply



Chart Courtesy of St. Louis Fed

I must admit that chart looks pretty scary. However, let's look at it another way.

Base Money % Change From A Year Ago



Now that looks even scarier. The only other times we have seen base money supply soar like this were in the Great Depression and World War II.

While on this subject let's look at the same chart as above one more way.



The only other time since 1918 that the base money supply chart looks like it does recently was right before the great depression.

A Practical Look At "Flation"

Here is a table of conditions and whether or not one would expect to see those conditions in inflation, deflation, stagflation, hyperinflation, and disinflation. Some expectations are debatable so I left those blank.



I see a perfect match on 15 items using Case-Shiller CPI (CS-CPI) for number item 7. See Case Shiller CPI vs. CPI-U November 2008 Analysis, for why CS-CPI is a far better measure of consumer prices than the reported CPI-U. CS-CPI is explains treasury rates and the Fed's actions quite nicely.

Those using practical definitions have an easy time explaining things. Those lost souls screaming hyperinflation missed the boat completely. Hyperinflationists have had trouble for years explaining falling home prices, and falling treasury yields.

Those screaming stagflation no longer have a case with falling commodity prices, a rising dollar, and falling treasury yields.

Disinflation makes no sense with stock prices down 40% and corporate bond yields soaring. Stocks do best in disinflation. Corporate bond yields drop in disinflation. This is not disinflation by any stretch of the imagination.

Routine inflation makes no sense in light of corporate bond yields priced for bankruptcy, collapsing stocks, plunging commodity prices and a negative CPI.

Those who think inflation is about prices alone were busy shorting treasuries, and looking the wrong direction for over a year. Only after the stock market fell 50% and gasoline prices crashed did the media start picking up on "deflation". Only those who knew what a destruction in credit would do to jobs, to lending, to retail sales, to the stock market, to corporate bond yields and to treasury yields got it right.

What It's Not

It's Not Disinflation
It's Not Stagflation
It's Not Inflation
It's Not Hyperinflation

What's left looks like a duck, walks like a duck, flies like a duck, and squawks like a duck. And that duck is deflation no matter what Humpty Dumpty suggests.

Well, I'm convinced. Anyone else?

On edit: fixed duplicate graph

[bluestateguy]

1. I don't see the lower prices at the grocery store

Or lower airline ticket rates.

Will this mean lower health care costs too? (Fat chance)

[Venceremos]

2. The prices at my grocery store got higher...

it's up to $5.00 and change just for a box of generic, cardboard tasting breakfast cereal.

[Warpy]

4. Get the bag instead of the box

Some of it is quite good.

[notesdev]

7. You will

Consumer prices take time to adjust. The major reason prices went up earlier this year was the run-up in the price of oil; end-product prices lagged in reflecting the higher cost of transporting them to the retail outlets. Now that oil has taken a nose dive and no price recovery for it is in sight, there'll be the same lag of a few months and then you'll see prices drop at the store.

It also depends which store you go to... of the two supermarkets I use, one has been lowering prices on all sorts of items and the other simply stopped raising them but hasn't done any lowering yet.

[gristy]

3. label your axis!

As my physics teacher would say. I don't mean just with units.

[Cirque du So-What]

5. I too am part of the problem

An opportunity arose a couple of months ago to obtain 500 tons of steel scrap at slightly lower than market price. I argued that the market was dropping anyway, so any savings by locking in at that price would be offset by lower prices in the near future. The scrap was purchased anyway, but in retrospect I was correct about the price continuing to drop.

This will become more commonplace as companies look to stretch their purchasing power. They will delay capital outlays until the last possible moment in anticipation of cheaper prices down the road. If everyone is doing this, lower prices become a self-fulfilling prophecy - with lower sales on everyone's balance sheet.

[anigbrowl]

6. Excellent analysis - well spotted...in addition, this:

(from the same blog) shows why we're not seeing much change in prices despite all this extra capital injection by the Fed:

http://4.bp.blogspot.com/_nSTO-vZpSgc/STY1HJ0P6TI/AAAAAAAAD6M/raKNktX8fWo/s1600-h/excess+reserves.png

'Excess reserves' are the excess over what a bank is required to keep in cash to cover its loans. The reserve requirement in the US is 10%: that is to say, a bank can loan out up to 90% of its cash, on the assumption that no more than 10% of depositors are ever likely to want their money at any given time.

From this we can conclude that the banks could loan out something in the region of $5.5 Trillion more than they are doing now, but are unwilling or afraid to do so. The total GDP of the US (ie, the total of wealth produced here every year) is about $12 trillion, so you could say that the banks are holding 6 months' worth of economic productivity hostage. This metaphor is more colorful than accurate, but you get my point.