Inflation, No-flation, Deflation

My inflation thrust indicator was signaling passage from 12 month
inflation to price stability (no-flation). Now, it has moved into even
lower ground, suggesting an eventual 12 month CPI which is
negative (deflation). Moreover, barring a significant rally in the
commodities markets in the months ahead, the indicator is
suggesting a deepening of deflation pressure over the first half of
2009. I take this analysis with a large grain of salt and so should you.
Commodities prices have dominated inflation momentum so far in
the new century, and being both volatile and difficult to predict, leave
us with unusually limited visibility when it comes to conjecture about
the prospective inflation (deflation) rate.

Current emerging deflation pressure largely reflects falling global
economic demand and production operating rates rather than the
emergence of large new sources of supply. Global economic demand
lost altitude so fast over the past 4-5 months that inventories
accumulated involuntarily. So, inflation hedge supply management
has turned into an inventory liquidation adjustment, with this
especially true for newer economic powers like China that lag in
inventory management techniques.

There is a "quickie" way to measure inflation expecations in the
markets. Simply divide the CRB commodities composite ($CRB) by
the long Treasury bond price ($USB). A rising trend signals that
expectations favor accelerating inflation. A falling trend signals the
opposite. The chart link below shows the rapid decline of inflation
expectations since mid-'08. Note too, the recent basing underway.
Chart is available daily here.