Current Inflation Prediction for 2009

Current Inflation Forecast

Inflation fell  1/2% from 2.63% in January to 2.14% in February.

The monthly inflation rate in February 2009 was 0.50% while the monthly inflation rate in February 2010 was 0.02%  so the Annual Inflation Rate fell almost 1/2%.

The question arrises now is this a one time event or are we haeading back toward deflation as Robert Prechter suggests?

His projections often appear impossible... until they happen. 

I personally find it hard to believe that all the liquidity pumped into the ecomomy via the Trillion dollar "stimulus" won't cause inflation. 

But if the money stays in the bank vaults and doesn't find its way into the economy as is currently happening then it is quite possible that all that money won't cause inflation.

It is also possible that the money will simply replace a portion of the money that evaporated when the stock market valuations collapsed.

So this month I have added an extra component to the MIP and that is a Deflation scenario line.

Basically it is what will happen if we see a monthly average of -0.07% deflation over the next year. This is a fairly small monthly deflation rate. December 2009 had a -0.18% deflation while July 2009 had a -0.16%  monthly deflation. 2008 saw monthly deflation rates as high as
 -1.92%.  

Interestingly even with monthly deflation rates that high (low?) annual deflation bottomed at -2.10% in July 2009. 

Long run we are still expecting inflation but in the short run it gets more difficult. I have heard it descrobed as balancing on a "knife edge".  One misstep and we could fall either way.

 Will the monetary expansion send us into hyperinflation? Or will inflation just continue to be "ordinary"? Or will the deflationary forces win and the economy will just implode.

Unfortunately, the MIP is limited by what it has seen over the last 11 months which has been inflationary but quite differently split the first six months had a total of 1.72% inflation while the second half only had 0.42% inflation.  So if the declines continue we could see more deflation.

The MIP has no way to factor in the massive monetary expansion, actions by China to remove "reserve status" from the U.S. dollar, natural disasters, Stock market crashes, etc. until after the fact, so we must be alert for these type of events.

So that is why I added the deflationary possibility.  Just to make you aware of what could happen if deflationary forces persist.

Rrmember, it takes about 2 years for monetary stimulus to result in inflation, so we could begin seeing massive inflation just beyond the MIP's current window.

Robert Prechter of the Elliotwave Theorist is forecasting deflation in spite of government actions to the contrary. To read his excellent arguments on why the government can't stop Deflation even with massive increases in the money supply Click Here.

Doug Casey on the other hand has good arguments for an inflationary crisis-  get his free report Crisis in Pictures.

Tim McMahon, Editor
Financial Trend Forecaster