THE GREAT DEFLATION?

Prices for U.S. consumer goods, excluding groceries, declined in March and April, falling 0.8 percent in the latter month, the largest one-month slide since December 2008, according to the U.S. Bureau of Labor Statistics.
Gasoline and energy prices, which are now heading back up a bit, led the price shrinkage, contracting by 10.1 percent.
Excluding food, fuel, and energy, the so-called core consumer price index fell 0.4 percent, the steepest monthly drop since the bureau began keeping records in 1957.
Prices for airfare, auto insurance, and clothing posted their sharpest price drops ever.
Economists expect prices to quickly recover a significant portion of their losses once economic lockdown orders are lifted. Many predict a short, dramatic recession followed by a slow recovery, perhaps extending through 2023.
TREND FORECAST: We disagree with the Wall Street consensus. There is far greater supply of most products than demand. And considering the reopening restrictions, escalating unemployment rates, bankruptcies, shattered economies, and shattered lives, supply will continue to outpace demand, thus keeping prices lower.
However, as central banks deflate their currencies by unprecedented printing of digital trillions backed by nothing and printed on nothing, in their efforts to artificially stimulate economic growth, it will cost more to buy products because the value of the currencies will decline.
Thus, gold, the ultimate safe-haven asset, will become yet more of a “precious” metal.
TREND FORECAST: We forecast that deflation will persist, since in many sectors, prices will not recover, which could set off a deflationary cycle: too few consumers are buying products as cash-strapped consumers shop less and buy less.
Indeed, while manufacturers lower their prices to move their goods, so, too, will their operating income decline. Thus, they will continue to lay off workers, which results in even fewer people able to buy things.
Deflation is not a danger in the food sector, where grocery prices have climbed an average of 2.6 percent, the largest rise since February 1974, as lockdown orders disrupted the food supply chain and closed processing plants.
The price index for eggs, fish, meat, and poultry rose 4.6 percent between March and April, with egg prices up more than 16 percent in some locales.
The cost of milk and breakfast cereal crept up 1.5 percent, baby food 2.7 percent, canned vegetables 3.6 percent, and juice 3.8 percent. Even doughnuts weren’t spared, adding 5 percent.
 Rising prices often spark inflation but, with prices falling broadly in other sectors, “a surge in inflation is the least of our worries,” said Gregory Daco, chief U.S. economist at Oxford Economics.
 
TREND FORECAST: Some economists say that price declines will be short-lived. They will not. Instead, they will endure for months, with some industries and economic sectors recovering faster or slower than others.
 
There is no risk of inflation through 2021.
 
And, while the government dramatically increases its debt load, with interest rates near zero and possibly going negative, the cost of paying it back will be low, thus keeping inflation low… temporarily, as we noted above.