June 2010 inflation analysis

The inflation index has dropped for three consecutive months, from 217.729 in March, to 217.579 in April, to 217.224 in May and to 216.929 in June. These deflationary results have resulted in increasing real interest rates.  Based upon the equation of (10 Year Bond Rate) minus (12 month inflation), real interest rates are on the rise:

What is concerning about this hat-trick of cpi decreases is that "three in a row" has only occurred four other times since 1954:

  • 1954-07-01 -> 1954-10-01 (4 in a row)
  • 1986-02-01 -> 1986-04-01
  • 2001-10-01 -> 2001-12-01
  • 2008-10-01 -> 2008-12-01
  • 2010-04-01 -> 2010-06-01
The 2001 and 2008 results occurred during/around a recession.

The June spread between the 10YBR and Federal Funds Rate is 302 basis points, which is the lowest since 2009-04-01 when the spread was 278 and rising. Any reduction in this spread is indicative of contractionary monetary conditions and negative results (whereby the Federal Funds Rate exceeds the Ten Year Bond Rate) are usually accompanied by a recession at some point (it was negative between 2006-07-01 and 2008-01-01, with the recession officially starting in 2007-12-01):

All in all, the signs seem to point towards contractionary effects on economic performance.

1 comment:

Anonymous said...

What is it called when a toothbrush that used to cost $1 now costs $3? That's inflation isn't it? Even if it's not a period 'known' for its high inflation, it still adds up over time.

So how do they measure how much money is in an economy?