Less Than Zero

The new inflation numbers for the month are very interesting.

Consumer prices posted a small rise in August, but outside of a big jump in volatile gasoline prices, inflation was essentially flat.

Consumer prices edged up 0.3 percent in August, matching the July increase, the Labor Department said Friday. Core inflation, which excludes food and energy, showed no increase in August.

So, consumer prices are going up due to commodities speculation.  Investors are putting money into basics like corn, wheat, sugar, rice and pork and that is raising the price on food.  At the same time, oil continues to hover between $70 and $80 a barrel so gas prices are still holding around the $2.80-$3 mark,  making things expensive despite the plentiful over-supply of oil products in the pipelines right now.  The flocking to commodities and continued high oil prices are providing inflationary pressures at the basic consumer level.

At the same time, core inflation excluding food and energy is basically in deflation right now due to the housing market's continuing massive depression.  Big ticket items like cars, washers and dryers, new PCs, all of those items are facing steep price pressures and discounting.  That's causing significant deflationary pressures.

Right now, those two forces are in balance, resulting in the near-zero inflationary rate figures for the year.  Economists call this "bi-flation".  It's not a good thing, because one of the two will have to crack and soon, leading to a painfully bad amount of the other.

All evidence points to that cracking being a flight out of the dollar to commodities, which will lead to big time inflation if not hyper-inflation.  The question is when.  In the meantime, there's plenty of opportunity to get trapped in an Ireland-style deflationary spiral, especially if the supports are cut by the Austerity Hysterics.

Neither one is going to be much fun to go through.  I think we're headed for a whipsaw ride from one to the other, and soon.