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February 20, 2015

Here's What's Wrong with the 'Good' Deflation Argument

Here's What's Wrong with the 'Good' Deflation Argument

By Elliott Wave International


EW Editor's note: This article was adapted, with permission, from the February issue of The Elliott Wave Financial Forecast, a publication of Elliott Wave International, the world's largest market forecasting firm. All data is as of Jan. 30, 2015. Click here to read the complete version of this article, including specific near-term forecasts, 100% free.


Deflation is a decline in the supply of money and credit relative to goods and services in an economy.
History shows us that the most important deflationary episodes are invariably accompanied by comparable declines in equity, factory and retail prices.

The most pronounced deflations in U.S. history occurred during the Supercycle-degree declines that began in 1835 and 1929. The 2000-2002 stock market decline coincided with the steepest fall in year-over-year CPI since 1964. The 2007-2009 bear market featured outright negative readings in year-over-year CPI, the biggest contraction since 1949.

As we noted The Elliott Wave Financial Forecast last month, this time around, wholesale and consumer prices are already approaching outright declines; this weakness confirms the potential for a bear market that is bigger than that of 2007-2009.

With the major stock indexes still near their all-time highs, indicating that optimism is still the reigning attitude, pundits are proclaiming the potential benefits of deflation.

"It's like we've had a big tax cut," says an Oxford economist. The same economist coined the term "Joyflation" to "describe the combination of the oil-driven slowdown in inflation and accelerating economic growth."

Another headline generated by a formerly bearish economist says low oil prices "Could Be Market 'Nirvana.'"

Over the course of 2014, we charted this attitude's emergence. These more recent headlines capture the progression nicely:

Deflation Hits The Eurozone
- BBC, January 7, 2015
Asia Staring At Deflation
- Bloomberg, January 13, 2015
The U.S. Welcomes the Good Kind of Deflation
- Business Week, January 22, 2015

With "employers showing more confidence than they have since the Great Recession," the Associated Press concluded that the economy in 2015 is on track for "the fastest growth in a decade."
Consumers are happy, too.

On Jan. 28, the Conference Board's Consumer Confidence Index rose "to its strongest level since mid-2007 due to falling gasoline prices." The surge to 102.9 is the highest reading since August 2007, which was one month after the Dow Jones Composite index peaked that year and two months from the associated peak in the Dow Industrials. During the ensuing bear market wave of 2007-2009, consumer confidence fell with stocks to a 50-year low of just 25.3 in February 2009.

Click here to continue reading the complete version of the article as part of a lengthy excerpt from the newest issue -- including specific market forecasts, fully labeled charts and more -- 100% free.

This article was syndicated by Elliott Wave International and was originally published under the headline Here's What's Wrong with the 'Good' Deflation Argument. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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