minyanville

2. Deflation

Theinflation data will offer more fodder for the FOMC inflation hawks atthe next meeting, but in our view it is ultimately deflationary, andgold and the dollar this morning seem to agree.

But why?
Check out this chart from the Fed showing the adjusted monetary base.

A common misunderstanding is that falling prices causes deflation.
So, look at the PPI and CPI, they're going up, clearly causing inflation, right?
No. Deflation causes prices to fall.
Adecrease in the supply of money or credit and a decrease in the demandfor goods related to the inability to access credit is a perfectdeflationary cocktail.
You will know it in the market by a rising dollar, falling interest rates, declining stock market.
But what about stagflation? Remember, stagflation is simply the temporary transition from inflation to deflation.
Looking ahead, we will be talking about deflation in 2008, not inflation.

deflation? :)