Societe Generale’s Albert Edwards has been early on this story, warning of deflation as other market sceptics warned of Fed-induced hyperinflation.
In his new note to clients, Edwards points to an obscure inflation measure that reinforces his concerns.
“Staring catatonically at this months US Personal Income and Outlays press release I was struck by just how weak an alternative measure of the core PCE deflator it had become,” wrote Edwards. “The report says the market-based PCE is a supplemental measure that is based on household expenditures for which there are observable price measures. It excludes most imputed transactions (for example, financial services furnished without payment), i.e. it excludes prices which the statisticians have to invent!”
He noted that this measure was trending below other more popular measure of inflation like core CPI and core PCE, a favourite of the Federal Reserve.
But what really concerns him is the more recent moves in the measure.
“Most significantly, there has been an unusually wide divergence just recently,” he continued. “Whereas the closely watched core PCE deflator has risen by 0.1% in each of the last four months, the market-based measure of core PCE deflator was flat in both October and September. Now we are dealing with very small numbers here, but that still means an annualised rate of inflation was 0.5% rather than 1% (see chart below).”
Deflation can be a very scary thing that is very difficult to reverse. Falling prices cause consumers to hold back purchases, which in turn causes prices to fall further. This leads to falling profits, falling wages, falling everything.
“If the market had any idea that we were starting to register zeros on this measure, I think there would be panic aplenty,” said Edwards.