From INFLATION to Instant DEFLATION

I stirred up quite the controversy in Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats. Well, the data is starting to come in now, and it flipped from INFLATION to DEFLATION almost instantly.

PPI in the US plunged the most on record. That is the most since 1947.
CPI in the UK plunged the most in 11 years. That is the most since 1997.

These numbers are down hard because the commodity bubble burst. But that is just the beginning. The debt bubble and by extension the asset price bubble has burst as well.

DEFLATION is Here. Ben ‘Helicopter’ Bernanke can print all he wants. The sheer magnitude of debt and wealth destruction will overcome his puny efforts.

In Inflation, Deflation, Money Velocity and Gold David Rosenberg at Merril Lynch (now Bank of America) argues: “Money supply will increase but money velocity will not.”

I concur and remain in the deflationist camp.

U.S. Producer Prices Plunged 2.8% in October, Most on Record: “Prices paid to U.S. producers plunged in October by the most on record as weakening global growth caused demand for commodities to dry up.

The larger-than-forecast 2.8 percent drop was the biggest since records began in 1947 and followed a 0.4 percent decline in September, the Labor Department said today in Washington. So- called core producer prices that exclude fuel and food rose a greater-than-anticipated 0.4 percent for a second month, indicating declines have yet to make it down assembly lines.

Recessions in Europe, Japan and the U.S., combined with slower growth in China and India, may keep subduing raw-material costs as companies cut back. Deflation, or a prolonged decrease in prices, is displacing inflation as a threat for the Federal Reserve and other policy makers throughout the world.

“The broad-based softening of prices shows inflation is contained, and disinflation is taking hold,” John Herrmann, president of Herrmann Forecasting LLC in Summit, New Jersey, said before the report. “It gives the Fed the ammunition to cut rates further.”

Wholesale prices were projected to decline 1.9 percent, according to the median of 76 forecasts in a Bloomberg News survey. Estimates ranged from declines of 0.3 percent to 2.8 percent.

Core prices were projected to rise 0.1 percent, according to the survey median.

The U.K. inflation rate fell more than economists forecast in October, recording the steepest drop in at least 11 years, the Office for National Statistics said today in London. Consumer prices rose 4.5 percent from a year earlier, compared with 5.2 percent the previous month.

Year Ago

Prices paid to U.S. producers rose 5.2 percent from October 2007, after an 8.7 percent gain in the 12 months ended in September.

Excluding food and energy, the increase was 4.4 percent from a year earlier, the most since 1989.

The drop in wholesale prices was led by a 13 percent decline in fuel costs, the biggest since 1986, and a 0.2 decrease in the cost of food.

Producer prices are one of three monthly inflation gauges reported by Labor. Prices of goods imported into the U.S. fell last month by the most on record, a report last week showed.

Figures due tomorrow may show consumer prices dropped 0.8 percent in October, the most since 1949, according to the Bloomberg survey.

November Declines

Figures this month indicate prices will keep dropping. The government asks producer-price survey participants to report costs for the Tuesday of the week that includes the 13th. On that basis, crude oil fell 24 percent in October from the prior month on the New York Mercantile Exchange. Oil slid another 25 percent a barrel this month.

The costs of intermediate and crude goods, used in the earlier stages of production, also dropped by records, indicating price pressure may keep subsiding.

After contracting at a 0.3 percent annual pace in the third quarter, the U.S. economy may shrink again this quarter and the first three months of 2009, according to a Bloomberg survey conducted from Nov. 3 to Nov. 11. The slump would be the longest since 1974-75.

Europe and Japan slipped into a recession last quarter, and China's economy, the biggest contributor to global growth in 2007, is slowing.

Dow Chemical Co., the largest U.S. chemical maker, is among producers hurt by a drop in demand. The prices Dow charges for two of the most-used plastics, polyethylene and polypropylene, fell as much as 40 percent since September, giving up gains achieved since June, the company said. Midland, Michigan-based Dow is closing more factories as sales decline.

“This is as bad as we have ever seen it in our lifetimes,” Chief Executive Officer Andrew Liveris said in a Nov. 13 interview. An increase in prices “is probably going to be near impossible in the next three to six months.””

U.K. Inflation Rate Falls Most Since at Least 1997 (Update4): “The U.K. inflation rate fell more than economists forecast in October, recording the steepest drop in at least 11 years and giving the Bank of England scope to cut interest rates further as the economy slides into a recession.

Consumer prices rose 4.5 percent from a year earlier, compared with 5.2 percent the previous month, the Office for National Statistics said today in London. The median forecast in a survey of 27 economists was 4.8 percent. The rate has now exceeded the bank's 2 percent target for a 13th month.

Central bank Governor Mervyn King said last week that the economy is probably in a recession, and policy makers will cut borrowing costs as low as needed to stave off deflation. The bank forecasts inflation will slow below the government's 1 percent lower limit unless it reduces the benchmark interest rate from the current 3 percent.

“Inflation is now yesterday's story,” said Matthew Sharratt, an economist at Bank of America Corp. in London. “It's going to fall well below the target next year. This leaves the door wide open for a deep cut in interest rates in December.”

Slowing inflation will allow policy makers around the world to reduce interest rates, International Monetary Fund First Deputy Managing Director John Lipsky said yesterday. He cited the U.S. Federal Reserve and the Bank of England as having already taken “decisive” action. The IMF predicts advanced economies will together contract next year for the first time since World War II.

Gilt Reaction

U.K. two-year government notes rose after the inflation data, pushing the yield to the lowest level since at least 1992, when Bloomberg started collecting the data. The yield on the two-year gilt dropped 10 basis points to 2 percent as of 12:43 p.m. today in London.

Consumer prices fell 0.2 percent on the month, the first decline for October since 2001, the statistics office said. Lower oil, transport, and food costs pushed the inflation rate down by 0.7 percent, the biggest drop since records began in 1997.

Oil prices have fallen by about two-thirds after climbing above $147 a barrel for the first time in July, while corn and wheat prices are also down by more than half from records reached earlier this year.

J Sainsbury Plc, the third-largest U.K. supermarket chain, posted earnings that beat analysts' estimates on Nov. 12 and said its price cuts lured affluent customers away from rivals.

Deflation Concern

Slower growth is sparking concerns of deflation. U.K. manufacturers' raw material costs and output prices fell at the fastest pace in 22 years in October, and the central bank's forecasts show the economy contracting through most of next year.

King said on Nov. 12 the bank is “prepared to cut bank rate to whatever level is necessary,” to keep inflation at the target, and didn't rule out putting the benchmark at zero. The bank's 1.5 percentage point reduction this month was the biggest since 1992.

King also said he wouldn't be surprised if the retail price index fell below zero to reflect cuts in the interest rate. The retail price inflation rate, used in wage negotiations, dropped to 4.2 percent in October from 5 percent the previous month. The decrease was the biggest since January 1993, the statistics office said.

So-called core inflation, which strips out costs of food, energy, tobacco and alcoholic beverages, slowed to 1.9 percent from 2.2 percent in September.”