US Inflation -- Some Additional Thoughts

As most of you know, the US has been in a period of decelerating inflation for over 30 years now.
In fact, the US economy has become increasingly deflation prone reflecting the steep deceleration
of the CPI composite which excludes volatile fuel and food prices.

The deceleration of inflation pressure has unfolded despite occasional bouts of strong money and
credit growth.

My broad measure of money growth to include the major sources of credit funding has been on the
flat side for nearly three years. Money M-2 has increased by 16.6% over this period. But this was
offset by a substantial decline of large or "jumbo" bank deposits and the collapse of the important
commercial paper market. Since the very broad measure of money growth has been contracting
since late 2008, the Fed has been forced to buy $1.5 tril. of securities to maintain liquidity in the
system. The raw material for sustained higher inflation in the future has increased by zilch overall
over the past three years.

It is normal for commodities prices and for the CPI to accelerate up during economic recovery /
expansion periods. The pressures can be intense, but when the expansion period tops out, the
reversal to weakness in commodities prices and deceleration of the broader measures of inflation
can also be strong. Looking out 5-6 years, it takes no stretch of the imagination to envision a
cyclical peak of 5% for the CPI measured yr/yr to be followed by a return to mild price
deflation when the economic cycle heads into another downturn.

For the US, it is true that inflations of consequence start in the commodities pits and especially
so if it is fuels prices that lead the way. Over the past 30 years, the supply / demand profiles for
fuels, industrial commodities and other raw materials have seen a shift away from excess supply
to much greater balance reflecting underinvestment and a broadening of rising demands from
the faster growing emerging economies such as China. Longer term, the potential for higher
inflation in the US has increased on supply / demand grounds. Even so, It takes a series of
economic and policy circumstances playing out over an extended period of time to generate a
sustainable acceleration of peacetime inflation.

There is no shortage of debate on the web over whether inflation or deflation will prevail in
the years ahead. My position is that the marked increase in the tendency toward deflation must
first be arrested, and that if it is, there will be many hurdles to overcome if inflation pressure
is to take hold and sustain in a longer run uptrend in the years ahead.