Inflation Situation

The CPI hit an all-time peak of 220.0 in 07/08. With recession in
full flower, it fell to an interim low of 210.2 in 12/08. The CPI has
recovered most of the decline since, but stands now at 218.0 for
June. Thus, technically, the US is still in deflation and more so
when you view asset deflation such as losses in home values and the
SP 500 over recent years.

From the interim low of 210.2 set 12/08, the CPI recovered by 3.7%
through 04/10, but has flattened out recently on weakness in the
commodities market and a continuing deceleration of the CPI
excluding food and fuels. The inflation pressure gauges I use did
peak over the Mar. / Apr. period and remain sluggish. My longer
term pressure gauge, which was signaling a sharp rise of inflation
in 2011, has moderated very substantially since the spring of 2010.

One key gauge of inflation potential, the capacity utilization rate,
stands at 74.1%, which is very low for the post WW2 period, and
is well below the the 80% level, when pricing pressures tend to pop.
Prospects for a moderation in the growth of China's manufacturing
output has put a chill on commodities prices, and is proving
beneficial to the US on the inflation front.

Measured yr/yr, the CPI was up by 1.1% through 06/10, and it
may well stay subdued until positive interest returns to the
commodities market. Commodities composites have bounced a bit in
recent weeks, but have yet to challenge a mild downtrend now in
place. CRB chart. When looking at inflation potential, you need to
watch commodities and oil in particular like a hawk.

The supply / demand equation for petroleum products and for
industrial commodities has tightened appreciably over the past
decade in comparison to the 1980s - 1990s. With Asia (ex. Japan)
and South America now sporting more vibrant economies, I have
developed a GDP weighted global total economic supply/ demand
pressure gauge. It has recovered substantially from its recession
low in early 2009, but at a current reading of 132.0 is well below
the 140 - 145 range that would suggest global inflation pressure
and an intense run-up in petroleum and industrial commodities
that could force sharp synchronous credit tightening by major
central banks. We are still in a "cool zone" now. One lesson from
the global gauge is that the US can experience cyclical inflation
pressure if the world is running hotter but the US is still running
well below effective capacity.