Look at the chart from Greg Weldon (www.weldononline.com). As he notes, retail sales are posting their worst reading since the last recession.

Prices at the wholesale level actually fell. Silvia thinks the consumer price index will be in the neighborhood of 2%. Right now, a lot of people think that sounds crazy, but I agree. First, remember that CPI measures changes over the last 12 months. As an example, look at the oil price chart below. Starting next spring, unless energy prices rise a lot, we are going to see year over year comparisons for energy prices that will be negative. If oil drops to $80, which it very well could, that would have the affect of decreasing inflation next summer, by a significant amount. And given that Europe and Japan are in a recession, and emerging markets have reduced the demand because of high prices, thinking that oil in the short term could be lower is not unreasonable. (Long term I think oil will go MUCH higher, but that is another story.) A 40% reduction in gas prices from their peak is not out of the question. That would impact inflation by pulling it down.

You can make the same case for a lot of commodities and some of the food complex as well. Year over year comparisons in a few quarters are going to start to look good. In absolute terms looking back a few years, it will still feel like inflation, but the numbers don’t have feelings.

With Europe and Great Britain central banks likely to cut rates, the dollar is going to get stronger (as predicted here long ago). That will also help hold inflation down. Consumer spending is going to continue to be under pressure, which will not be good for stocks, which means that those facing retirement are going to have to save more and spend less. I think this time next year we will start to see stories about deflation. I know, call me crazy, but given that we have seen two major bubbles burst in the last year (housing and credit), it is not out of the realm of reason. It is what SHOULD happen. Bursting bubbles are by definition deflationary events.

Within a few quarters the Fed will not be under pressure to raise rates, especially with rising unemployment and what is clearly an economy on the ropes. Further, banks need lower rates in order to re-liquify. Home buyers will need lower rates as well. I think, as I have written for a long time, that the Fed is on hold for a very long time. And I am not sanguine that the next move will be a rate hike. This time next year when inflation is seen as yesterday’s problem and unemployment is rising, the drums may be pounding for a rate cut. We live in interesting times.

Source: Housing: Are We Near the Bottom?

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