Market Analyst Is Looking at Something He Says Should Be Causing 'Panic Aplenty

Inflation in the world’s leading economies has been kept mostly in check despite the common trend of sluggish economic growth, according to many relieved economist and analysts.

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However, analyst Albert Edwards in a recent note to investors warned that the prospect of deflation (i.e. a severe decline in prices brought on by falling supplies and credit) remains a threat.

Deflation, like inflation, can do serious harm to the economy. Whereas inflation sees prices rising, deflation sees prices falling.

Deflation is brought about by a lack of supply and credit could lead to consumers purchasing less.

Consumers purchasing less means prices will continue to fall, which could eventually lead to “falling profits, falling wages, falling everything,” as Business Insider’s Sam Ro notes.

But let’s back up and take a look at Edwards’ warning.

"Staring catatonically at this months (sic) US Personal Income and Outlays press release I was struck by just how weak an alternative measure of the core PCE (personal consumption expenditure) deflator it had become," Edwards, who works for French financial services company Societe Generale, wrote.

Personal consumption expenditure (PCE) is simply a measure of price changes in consumer goods and services.

Core PCE, on the other hand, is a less volatile measure of the PCE price index that excludes seasonal food and energy prices.

And it's the recent data regarding the market-based measure of core PCE that has Edwards worried.

"The report says the market-based PCE is a supplemental measure that is based on household expenditures for which there are observable price measures,” Edwards wrote. “It excludes most imputed transactions (for example, financial services furnished without payment), i.e. it excludes prices which the statisticians have to invent!"

Market-based PCE has trended below similar measures of inflation, including the core consumer price index (CPI), which measures changes in the price of goods and services purchased by households, the letter added.

"Most significantly, there has been an unusually wide divergence just recently," he wrote. "Whereas the closely watched core PCE deflator has risen by 0.1% in each of the last four months, the market-based measure of core PCE deflator was flat in both October and September. Now we are dealing with very small numbers here, but that still means an annualised rate of inflation was 0.5% rather than 1%."

Edwards adds this: "If the market had any idea that we were starting to register zeros on this measure, I think there would be panic aplenty."

Image source: Business Insider

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