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A benign CPI reading last week suggested that, by the skin of our teeth, we’re still not experiencing the dreaded “D.”The headline of 0.3% looked plenty inflationary, though excluding food and energy, inflation only registered at 0.1%, and even that’s probably distorted to the upside.
As David Goldman at Asia Times notes, rents are still trending higher, in contrast to what we know are still-saggy home prices, thus distorting the CPI for the same reason that the CPI didn’t register much inflation during one of the biggest bubbles of all time.
And it’s probably going to get worse, if only due to demographics (one of Goldman’s favourite subjects):
Asset markets, though, reflect considerable deflation risk. A preference for cash and fixed-income assets over brick and mortar is a statement that physical assets are more likely to be cheaper in the future. There is a huge demographic tailwind behind fixed income markets, as I mentioned on the Kudlow Report Wednesday evening. The population is ageing rapidly: between 2005 and 2020, the proportion of Americans aged 60 and over will rise from 16.7% to 22.8%, according to UN data. For “more developed regions,” the increase will be from 20% to 28%. That generates a huge demand for savings instruments. And that is inherently deflationary: ageing savers buy future goods (securities) rather than present goods.
Don’t miss: Gary Shilling’s guide to the coming deflation >