Business inflation

Business inflation

Business inflation is normal on our sliding scale. The normal rates of inflation and growth will not be scored highly. If there is inflation, we will have a short currency bias, but within the normal bounds, we will not assign to this a high score.

When there is a deflation, a minor long bias score occurs because history tells us this occurs in 37% of the months, so it is quite a common occurrence. Monthly business inflation in the US does not simply occur only when there is GDP contraction. Zero inflation of deflation occurs quite frequently even during GDP expansions.

This can be a simple case of oil prices falling to CPI statistics. If you filter the spreadsheet for months below -0.05%, you will see that there are 45 months when deflation is less than this. 21 of these months occur after the year 2000. This is no coincidence given we have had a period of historically high and volatile oil prices.

When deflation begins and is small, we must have a minor long currency bias. When deflation is extreme, we must have a short currency bias predicting inflation because it is apparent that the Fed will act sooner than later.

In the spreadsheet, if you filter for values greater than 1%, you will find there are 66 cases of monthly PPI above 1% since records began in 1947. You will see many of these occurred in the last 15 years and during the 1973-1974 oil crises.

Extreme inflationary pressures tend to occur when there is significant growth in the economy or at the end of the cycle prior to slow down or when the Fed aggressively act to spur inflation in crisis, adding fuel to our argument that in periods of severe deflation, we must have a short currency bias. As the CPI scoring, we must have a short currency bias on the extreme inflationary moves.