Inflation Potential

Gauges which signal future inflation rebounded dramatically over
roughly the past year or so. However, the rebound in the pressure
gauges merely signaled from deflation to mild inflation. Moreover,
as a result of recent weakness in commodities prices, inflation
thrust has fizzled in the short run. (CRB commodities chart)

Commodities were set to be the inflation driver this year as they
were in 2009. Last year, commodities rose rapidly on a strong
global economic turnaround off very depressed levels, but that
price uptrend was broken earlier this year as traders figured
that inventory pipeline refilling would be complete by mid - 2010.
There has been extra downward pressure on the CRB recently as
China -- a major buyer of raw materials -- has been signaling it
desires to avoid overheating -- and as traders handicap a
presumed slowdown in Europe's recovery in the wake of the
recent uproar over debt addled EU members such as Greece
and Spain.

Now, note that the CRB is moving toward an oversold situation in
the short run, and note too, that commodities can be volatile.
Thus, one cannot vouchsafe a flattish CPI for more than a couple
of months.

My longer range inflation thrust measure, which keys off the US
capacity utilization rate and the leading economic indicators, is
currently very tame for 2010, but suggests a sharp acceleration
of inflation pressure in 2011 as operating rates rise significantly
further and cost pressures build broadly. These currently still
low broader measures of economic activity have indeed partially
offset the impact for the inflation picture from commodities over
the past year, but that could all change in 2011 as economic
recovery progresses.