Is Inflation or Deflation the Concern?

Here is an interesting excerpt from Colin Twiggs of IncredibleCharts.com and I thought I would post it for you.

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Consumer Price Index

Declining consumer and producer price indexes indicate that the US economy is undergoing a period of deflation. Despite their best efforts, the Fed and Treasury are unable to halt the deflationary impact of the credit contraction. To paraphrase Warren Buffett: the tide is going out and will soon reveal which financial institutions have been swimming naked.

Deflationary effects of the global credit contraction have been echoed in most major economies. Starting with China in February, the contagion soon spread to the US and Japan, with France, Germany and Canada now joining in. Two exceptions are the UK, which is printing money at an alarming rate, and Australia, supported by a premature housing recovery.

July data for Australia and Japan is not yet available.

Mild deflation would do no harm to the economy. In fact, this is the natural rate of inflation. Advances in technology and productivity should lead to a gradual reduction in consumer prices over time, outstripping the inflationary effect that an expanding population has on prices of limited resources such as land. Unfortunately few of us have experienced deflation in our lifetime — because of insidious currency debasement by central banks.

A deflationary spiral, however, can have a devastating impact on the economy, especially on the financial sector. This is the Fed’s worst fear: that contracting credit causes falling asset prices, in turn causing a further contraction of credit. Any hint of that would force the Fed to print money at a rate matching the Bank of England.

Signs that the Fed will be forced to debase the currency would send the price of gold soaring, while indications that a deflationary spiral has been averted would lead to a decline in demand for gold.

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To learn more about inflation and deflation check out this video.  It has been one of the most popular I have posted and you get access to some fantastic information.  Check it out as well : http://www.ino.com/info/429/CD3784/&dp=0&l=0&campaignid=3

Have a great weekend everyone,

~Cory Mitchell, CMT
Chief Market Strategist
Remember, failed breakouts are tradeable too!

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