Less Than Expected Is Still More Than Nothing

by Mitchell Clark, B. Comm.

The inflation situation at the current time looks to be quite contained, but the risk is still out there. Recent numbers showed that consumer inflation rose only slightly at 0.1% in May. From my perspective, it’s kind of surprising to have any price inflation at all considering the current recession. According to the Fed, this is low inflation and the good news is that this means the central bank will be able to keep its benchmark interest rate very low, likely for the entire remainder of the year.

There have been some unfavorable weather conditions for farmers this spring and it’s looking like crop yields won’t be as good as expected this year. This means that there will likely be price inflation in food items over the next several quarters. So far this year, government data suggest that the price of a basket of food stuffs has actually fallen. This is very likely to change going forward.

No matter how slight, however, there is still inflation in the economy and this to me is surprising, as well as being ominous for the future. After an almost worldwide collapse in financial markets, closed factories and lower incomes, prices are still creeping higher. The latest numbers were welcomed by the stock market, because consumer price inflation was less than expected. But, there is still price inflation in the economy. All it would take is just a little recovery in the general economy and we could have a serious problem on our hands.

From a financial markets perspective, most investors aren’t worried about inflation over the near term. The economy is still very much at risk and, in the absence of declining unemployment, a lot of investors don’t think the time is right to worry about price inflation.

One trend that seems to be holding this year is that the prices of oil and gold seem to be trading commensurate with prevailing sentiment about the economy. As expectations for recovery come down, so are the prices of oil and gold.

The stock market has been due for a period of consolidation for a number of weeks, so I think it’s fair to say that the current pullback is a healthy development. This period of consolidation could last a while and it’s anyone’s guess as to what might happen after. There’s just too much uncertainty in the underlying economy to know whether the bear market rally can continue.