Why Speculating About Deflation May Not Be Premature

The prospects for deflation are rarely discussed in the mainstream financial media. So few expect it — despite the increasing number of warning signs.

As the July Elliott Wave Theorist noted:

Looking forward, many signs point one way: to a giant sea change in mood and markets. Stock market extremes, the global debt glut, empty commercial real estate, slipping property prices, slipping producer prices, stalling economies: They all point to one thing: a looming deflationary crisis. [emphasis added]

At least one economist seems to agree. Here’s an Aug. 16 Markets Insider headline and a quote from the article:

Deflation could soon hit the US as real estate and stock prices are at risk of crashing, economist says

Already, commercial property values are under pressure, while a potentially overvalued stock market could face a swift correction if conditions sour. A plunge in the price of these assets would go a long way in sparking deflation, [Wermuth Asset Management] argues.

“To speculate about deflation again at this point looks premature at first glance, but not at the second. For several reasons the risk of a falling consumer price level has increased,” economist Dieter Wermuth said.

Taking a global view, an Aug. 9 Wall Street Journal headline states:

China Slips Into Deflation in Warning Sign for World Economy

Meanwhile, our European Financial Forecast, which is part of our Global Market Perspective, took this angle on deflation in the July issue:

At this point, the economic and financial components of commodity prices are conspiring to produce some jaw-dropping collapses… Nickel prices, a widely watched market due to the metal’s industrial demand, are off 61% since March 2022. Prices for natural gas, which European leaders scrutinize due to the market’s purported geopolitical sensitivity, are down an astounding 91% since the market’s spike high that coincided with Russia’s invasion of Ukraine. [There’s also been] a 33% decline in average diesel prices in the United States, reflecting deflationary trends in transportation, business activity and energy markets. Meanwhile, the Bloomberg Commodity Spot Price Index, which covers a wide swath of energy, metals and agricultural commodities, has sunk 29% in 12 months.

Of course, the prices of commodities and financial markets in general fluctuate, but the overall trend appears clear.

You will find more analysis in the August Global Market Perspective which points to a developing deflationary trend.

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