There's no ignoring the rising cost of gas and food. Ouch!
Those prices increases grab our attention at the gas station and grocery store, and in the occasional economic headline.
So how do we reconcile today's gas and food prices with this analysis from the January 2011 Elliott Wave Theorist?
"The monetary trend is deflationary, and the economic trend is toward depression."
It's important to begin by noting the word "trend" -- because a trend usually includes countertrends. It is obviously true that a temporary reflation has occurred in some notable consumer items. This has happened in conjunction with the market rally.
Yet our analysis indicates that these countertrends have not changed the larger monetary and economic trends cited in the Theorist. And we certainly do not accept the consensus of economic commentators, namely that inflation is a certainty.
Gas and food costs appear to be such a persuasive argument for inflation that it's easy to overlook other economic data -- such as, for example, this recent CNBC article titled "Double Take: Inflation for Majority of Economy at Record Lows" (4/20):
"Day after day the American public is inundated with media stories about surging food and gas prices, but if they want the real inflation story, they should ask a bartender.
"The rate of change in prices for a beer or cocktail at the local pub -- a component of the Consumer Price Index -- is actually decelerating from a year ago. In fact, the annual change in prices for data processing, recreation, lodging, medical services and tuition are all showing a downward trend, according to David Rosenberg’s analysis of the government’s CPI data."
Those are all major sectors of the economy -- and they're all seeing prices head downward. What's more, the quote doesn't include the sector that has imposed deflation on virtually all homeowners: the price trend of residential real estate. Take a look at the chart below:
"This chart of median home prices shows the re-awakening of deflation, which contributed so powerfully to the initial economic decline. The move back through the low of late 2008 reveals that another dramatic house price deflation is already unfolding."
Elliott Wave Financial Forecast, April 2011
The misfortunes in the housing market have become downright ironic: 13% of U.S. homes are unoccupied, even as tougher lending standards make first-time home buyers struggle to get a mortgage.
The deflationary trend has not "gone away." Let's return to the April Financial Forecast:
"Some people get aggressively agitated when we contend that the deflation of 2008-2009 is not over. But the deeper the consensus develops that inflation is inevitable, the more convinced we are that deflation is the inevitable course."