Summary
-
History clearly shows that asset prices, those of stocks and/or real estate, are always the first to be hit by deflation.
-
A generalized drop in price levels in the real economy constitutes a very different scenario from one in which total inflation temporarily decouples from core inflation.
-
The bursting of a speculative bubble or any other shock can cause the economy to slow down to such a point that wages will contract if the unemployment rate surpasses a certain level. Core inflation then slides into negative territory and a deflationary spiral is set in motion.
-
After 14 months of recession and with the unemployment rate now at just over 7%, the U.S. labour market still poses no major deflation risk.
-
At the crux of the matter lies the duration of the current U.S. recession. The longer it lasts, the more the unemployment rate will rise and the more the risk of wage deflation will grow.
-
Colossal stimulus measures are presently being deployed to stanch the bleeding and revive economic activity. Under the circumstances, we are convinced that the U.S. recession will not last long enough for asset price deflation to make it down the entire food chain all the way to wages.
-
Although total CPI growth will most certainly slip into negative territory, this is not to say that the United States will plunge headlong into a deflationary spiral.
-
The Fed may have lost this leg of the race against recession, but we believe it will carry the day down the line.
