Deflation in 2015? These Four Charts Say Yes

Investors are asking if deflation in 2015 is a real concern.

The answer is, at this point, a convincing yes. A confluence of market factors point to this harsh economic reality.

But Americans aren't as familiar with deflation as they are with inflation. Few were even alive the last time America experienced deflation.

"There has been no episode of persistent deflation in the United States since the period from 1927 to 1933," notes author and CIA economist James G. Rickards in his book, The Death of Money.

But deflation is typically worse than inflation.

In a deflationary period, prices will drop, corporate profits will dry up, wages will shrink, and all of this will reinforce the conditions of recessions. This happens for two reasons.

The first is that deflation keeps money on the sidelines as consumers wait for prices to fall further. This causes demand to shrink.

Deflation also adds to the real value of debt. This makes consumers and businesses less likely to take out loans and make big purchases to grow the U.S.'s consumption-driven economy.

And deflation runs counter to the goals of most of the world's central banks. Most notably, the U.S. Federal Reserve.

"Central bankers want inflation so they can pay back inflated debt in cheaper dollars," said Money Morning Capital Wave Strategist Shah Gilani.

But as we start 2015, deflation has arrived. Just check out these four deflation indicator charts...

Deflation in 2015 Indicator No. 1: Falling Crude Oil Prices

deflation in 2015The accompanying chart shows the punishment that crude oil prices have endured over the last 12 months. As of yesterday's close (Tuesday) of $46.47, crude oil has fallen 51% in that time.

Crude oil futures have been trading near lows not seen since April 2009. And since peaking in June 2014, prices have fallen 56%.

It is true that the consumer has enjoyed paying less at the pump.

But observers make the mistake of assuming falling oil prices put more money in consumers' pockets and encourage economic activity elsewhere. That's not always the case.

Not everyone realizes that this is a symptom of deflation. Falling oil prices and deflation go hand in hand. One of the biggest problems with widespread, economy-wide deflation is that it hammers GDP growth. As mentioned before, when consumers expect falling prices in the future, they hold off consumption in the near-term, and economic activity is subdued.

"They could use it to pay off debt - pay off credit card cards, pay off their kids' student loans, pay down a mortgage, etc.," Rickards said on RT's "Boom Bust" last month. "There's an alternative to spending which is saving."

In other words, consumers could be deleveraging. The U.S. is still weighed down by private sector debt. When more money goes to paying down debt, as opposed to spending, that feeds into deflationary pressures. Deleveraging stifles consumption, which will in turn hold back GDP growth. We see this in Japan.

Falling oil prices create the same phenomenon in a smaller - albeit, very important- segment of the economy.

Deflation in 2015 Indicator No. 2: Falling Commodity Prices

 deflationCommodity prices are a good signal of inflationary - and deflationary - pressures. Inflation is often defined by economists as "too many dollars chasing too few goods."

But the accompanying chart of the S&P GSCI commodity price index suggests this is not the case. Too few dollars are "chasing" commodities, and it's putting downward pressure on prices.

Here's a quick rundown of the major commodities price movements since the end of 2013 (excluding crude oil):

  • Heating oil futures are down 47%.
  • Natural gas futures are down 36%.
  • Copper futures are down 24%.
  • Unleaded gas is down 23%.
  • Soybean oil is down 15%.
  • Wheat futures are down 11%.
  • Corn futures are down 8%.

Commodities are falling across the board, from food to energy to metals. Such a broad array of commodities taking a dive together suggests weakening consumer demand.

Which brings us to the next deflation indicator...

Deflation in 2015 Indicator No. 3:  A Stronger U.S. Dollar

inflationThe U.S. Dollar Index, a weighted benchmark of a basket of currencies and their value against the dollar, has gained 15% in the last 12 months. It's stronger than it's been in over a decade.

[epom key="ddec3ef33420ef7c9964a4695c349764" redirect="" sourceid="" imported="false"]

A strong dollar is deflation simply by definition.

The dollar is strengthening as the Bank of Japan embarks on an accelerated money printing policy regimen aimed at countering its own deflationary struggles. And the Eurozone, also facing deflation, is primed to follow a similar monetary policy path after tomorrow's European Central Bank meeting.

A stronger dollar makes goods and services cheaper abroad, holding back net exports in the GDP equation. This also inhibits domestic demand. And as the dollar strengthens, so, too, does dollar-denominated debt. Debt becomes increasingly burdensome with a stronger dollar.

Weak domestic demand, constrained consumer spending and increasingly burdensome debt? That's deflation.

Deflation in 2015 Indicator No. 4: Lower Bond Yields

deflation debtAs we've already discovered, a stronger U.S. dollar cheapens the value of commodities. It prompts investors to seek out dollar-denominated investments that grow in value alongside a strengthening dollar.

And besides cash, what's a better deflationary investment than bonds?

Bonds are basically interest-bearing dollars. Real interest rates are calculated by subtracting inflation from nominal interest rates. This means during deflation, the buyers of debt are getting interest payments on top of the rate.

This also explains why lenders benefit from deflation while borrowers suffer.

Ten-year U.S. Treasury bond yields are below 1.8% today. And just a week ago they fell to 1.728%, a 21-month low. Such high demand for bonds is yet another sign of deflation.

The Bottom Line: Deflation in 2015 is real. Investors need to protect themselves. One way is to follow the Rickards model and buy cash. Dollars, euros, Singapore dollars - all are good deflation hedges. For Gilani, it's all about income. He suggests "any financial assets where you can lock in a return on dividends." Look for high-yield dividend stocks. Altria Group Inc. (NYSE: MO) is a good bet, and Chief Investment Strategist Keith Fitz-Gerald tells you more on why here...


Worried About Deflation? The United States is setting up for an imminent $100 trillion collapse. At least, that's what the post-9/11 CIA operation "Project Prophecy" shows us. This operation helped foil a 2006 London terrorist attack, and warned of the 2008 recession well before the fall of Lehman Brothers. Now it has spotted signs that a 25-year Great Depression is in our future, and you'll want to do all you can to preserve your wealth before the storm comes. CIA economist Jim Rickards tells you how to here...