A Jeffolie Year?

[Finster]

We've occasionally seen brief spells of falling prices and a rising market value of the dollar over that past two or three years. The period since April 22, however, marks the longest deflationary spell since 2000-2002, as the FDI (chart below) sits below its level on that date. That of course in itself does not mean it will continue, but there are reasons to believe it is not over yet.

First, conventional inflation indices, lagging indicators that they are, are continuing to register the inflation past, keeping the Fed from turning on the liquidity spigots. This is a positive development, since occasional setbacks in the general price level are necessary to avert a hyperinflationary spiral as otherwise market participants could shed dollars for other assets with impunity knowing that the only direction for the dollar is down. Premature ease would of course abort that all-important portion of the cycle. Second, as Bart hopefully will expand on here, over the same time frame monetary growth has leveled off from its previous frentic pace. The housing market, which served as one of the principal conduits for monetary expansion over the past few years, is now decidedly exerting pressure in the direction of monetary contraction.

[Jim Nickerson]

Re: A Jeffolie Year?

We've occasionally seen brief spells of falling prices and a rising market value of the dollar over that past two or three years. The period since April 22, however, marks the longest deflationary spell since 2000-2002, as the FDI (see chart in Finster's opening post) sits below its level on that date. That of course in itself does not mean it will continue, but there are reasons to believe it is not over yet.

Finster,

You confuse me. It appears to me that the FDI currently sits above where it was 4.5 months ago. You say this move up to a less negative value is "deflationary."

Previously, I hope I recall correctly, you taught me that upward moves on your ROC chart http://users.zoominternet.net/~fwuthering/FFF/Inflation were appropriately termed "disinflationary" until the movement crossed the zero % line, at which time further upward movements would appropriately be termed "deflationary." With reference to your ROC chart, it seems to me it shows rather level inflation for about the past year.

So it is correct that the last 4.5 months have been deflationary?

Also had I put in image tags to your chart, would that be violating some copyright?

[Finster]

Re: A Jeffolie Year?

Finster,

You confuse me. It appears to me that the FDI currently sits above where it was 4.5 months ago. You say this move up to a less negative value is "deflationary."

Oops, I misspoke (miswrote?). Rather than "below", I should have said "above".

Also had I put in image tags to your chart, would that be violating some copyright?

Not that I know of ...

Previously, I hope I recall correctly, you taught me that upward moves on your ROC chart http://users.zoominternet.net/~fwuthering/FFF/Inflation were appropriately termed "disinflationary" until the movement crossed the zero % line, at which time further upward movements would appropriately be termed "deflationary." With reference to your ROC chart, it seems to me it shows rather level inflation for about the past year.

So it is correct that the last 4.5 months have been deflationary?

You remember correctly, Jim. It's a bit technical, but the apparent contradiction stems from the mathematical fact that the process of taking a derivative (rate of change) amplifies high-frequency variation. Plotting a chart of the rate of change without applying some smoothing or filtering would result in a dense jungle of spiky peaks and troughs.

The choice of how much smoothing to apply, however, is a matter of judgment. The result is that even in principle, it is impossible to make an objective statement such as the "rate of inflation is X". That's why typically someone will quote the rate in terms such as "year over year", or "for the second quarter annualized". The rate depends partly on the choice of time frame. In my ROC chart, I could have applied a longer time frame (more smoothing), and the shorter term undulations would have been less pronounced and the longer term trends emphasized. On the other hand, had I used a sufficiently shorter time frame (less smoothing), the ROC line would be more sensitive to transients and would have risen above zero.

My use of the term "deflationary" here is in reference to the FDI series itself (as opposed to the rate of change of the FDI), which has no filtering at all applied to it (apart from that implicit in weekly data). It therefore reveals patterns such as that in place since April, which are essentially filtered out by the ROC smoothing.