Today we saw another dip in the CPI. March CPI pulled back 0.1% as declining energy prices offset the biggest jump in tobacco prices in at least 10 years (due to the large tax hike I mentioned in the March issue of Dividend Superstars).
When you couple this surprise dip in CPI with yesterday’s data on producer prices (showed a 1.2% drop), you can see that deflationary forces are still at work in our economy.
In fact, prices for consumer goods have dropped 0.4% over the last 12 months. That’s the first 12-month bout of deflation in 44 years.
Still, I remain concerned that when the tide turns again the Fed will have a difficult time applying the brakes. This fear has been echoed by many others, and Ben Bernanke addressed it in a speech yesterday. He said — no surprise – that the Fed is watching for the re-emergence of inflation and will fight it vigilantly when it appears.
But you and I both know how easy it is for the Fed to fall behind the curve. Therefore, I continue to suggest a small allocation to inflation-protected securities, along with a solid amount of dividend-paying stocks, which can do well no matter which side of the inflation-deflation debate is winning.
Related posts:
- Were Forever Stamps the Best Investment of 2008? As I said in my Money & Markets column on Tuesday, deflation might be here, but select items continue to defy gravity. Health care costs...
{ 2 comments… read them below or add one }
Dear Nilus,
Listening to all this talk about deflation, I’m beginning to feel as if I must be on another planet.
Every time I receive a bill for some kind of insurance, the price is up. Every bill I receive from the garden services I employ, the price is up. The price of gas is noticeably rising again around here on Long Island. The power company is raising its rates because folks have conserved energy to0 much! The MTA (trains to New York) are going to impose a near thirty per cent rate increase. The price of food? Have you noticed that more and more packages now have noticeably less in them - without any price reductions? I could go on and on. So if this is deflation, when will you tell us inflation is here?
I hear ya, Jay! LOL.
I think the key here is what we choose to include in our measures. Much of the current “deflation” is being driven by swings in oil, though other categories such as apparel have also shown drops.
There’s no doubt that many critical goods and services — particularly medical care and food — are costing more and more.
I believe inflation is the bigger long-term threat, and I was trying to imply that in my “we will not become Japan” argument.
Technically speaking, the immediate environment can best be described as very mild deflation. Is it all semantics? Maybe.
Bottom line: The risk of an all-out deflationary spiral is low, in my opinion. And the idea that marked inflation will return is the likeliest long-term consequence of the bailout efforts. I don’t know when I will say inflation is officially back. But I’m certainly telling everyone to scoop up inflation hedges right now!