Consumer prices fall for the first time since 1982, signal deepening of recession

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U.S. stock-index futures retreated as reports showing the biggest decrease in consumer prices and the fewest housing starts on record signaled the recession is deepening.

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"As the authorities try to find ways of stimulating the economy, sustained deflation would be a concern'' as consumers "hold off purchases now hoping to get lower prices later,'' said Jeffrey Coons, co-director of research at Manning & Napier Advisors Inc. in Fairport, New York.

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The bigger-than-forecast drop in the consumer price index was triggered by a plunge in fuel costs and discounts on automobiles and clothing to entice consumers amid a weakening economy. Excluding food and energy, so-called core prices unexpectedly fell for the first time since 1982.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

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Isn't Deflation a Good Thing?

As recently as 9 months ago, it was easy to find a quote by anyone (your author included) that inflation seemed to be running rampant. Crude oil was pushing new highs, grain prices were exploding, meats and soft markets were running up as well. The prevailing fear was, as the US entered what we thought to be a simply downturn, cuts by the Fed would lead to extreme levels of inflation. Gold would go to $5,000 an ounce, crude would trade over $200, the cash strapped, debt-laden consumer would be in greater trouble.

Flash forward to November. Crude has fallen over 60% from its’ peak prices. Grains have given back 30% or more of their gains. We are now in a new paradigm, deflation. On the surface, lower prices are good for a consumer that is more focused on making their mortgage payments than buying a new plasma TV. Lower gas prices and lower food prices would seem to benefit individuals, and it will over the short term. Typically, reductions in inflation that are lead by commodities markets are beneficial because it increases consumer’s real income. The problems pop up as you look towards the future, when prices fall too fast in too short of a period.

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The unfortunate offshoot of deflation is that debt becomes more costly to those who hold it. Following economic dictum, households that are debt laden will be more worried about paying off loans more rapidly. One only needs to look at the first and largest level of personal debt, mortgage debt, to see just how much the US consumer owes. It is not a pretty picture. It seems we are headed to an economically disastrous condition known as debt deflation. Debt deflation will have consumers and companies rushing to pay off debt as credit further dries up. This will lead to further price cuts at the retail level and more demand destruction on the product level. Deflation will in fact increase the real cost of debt, which is already historically high. Consumers recent reluctance to spend and borrow coupled with the banks ever tightening credit requirements are exacerbating the problem.

So now that I’ve told you where I believe we are, as a futures trader it is my duty to tell you where I think we will go and how I believe you can follow the trends that debt deflation will lay out. First, I’d like to make the case that commodity trend following (which has done very well during this economic downturn) will continue to do well in this climate. In a debt deflation cycle, real interest rates tend to fall. In the case of the US, I believe the Fed Funds target rate will be cut to .50 in December and further cut to 0 during the first quarter of 2009.

[Jasman0717 9]

According to the news the consumer prices dropped 1%, the lowest in 61 years. Are we really using that much less oil than just a few months ago when gas was almost five bucks a gallon or were we just getting screwed by the 'seven sisters' again. Mobil and Chervron reports the highest profits in a quarter ever. Hummmmmmmmm

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... were we just getting screwed by the 'seven sisters' again. Mobil and Chervron reports the highest profits in a quarter ever. Hummmmmmmmm

ding ding ding! we (may) have a winner!