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US Data and the Disinflation Story


After months of inflation coming in way above the Fed’s target, the latest releases show a different trend. US monthly CPI data for December showed a decrease in prices, which was largely due to the drop in energy prices. Yesterday, producer prices came back much lower than anticipated.

If inflation is bad, then the reverse would be true, right? It’s not so. Deflation is the opposite of inflation and can have the same economic consequences as inflation. In the US, for example, the Fed has never had a to deal with runaway inflation. While high inflation is true, hyperinflation has not been experienced like in Europe during the last century. Prior to the US leaving the gold standard, the Fed had to deal only with bouts of inflation. As such, The Fed is more concerned about inflation than deflation.

These are the warning signs

Deflation, which is more immediate for traders, is an important warning sign. In general, rising economic activity usually leads to higher prices. Conversely, deflation is often caused by slowing economic activity. Looking at yesterday’s data, the surprise deflationary PPI came along with a surprise drop in retail sales and industrial production. The data was…

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