Deflation… Bah humbug!  The arguments are still relatively new over whether the global economy is headed for a double-dip recession or just an extended period of slow growth.  There is a separate argument about whether the markets are going to have to deal with a new period of deflation after reports this week.   Comments on deflation (and inflation) from Fed Presidents Fisher and Bullard from yesterday gave reporters some ammunition to make a louder case for deflation.  It is just noise.

Bullard noted yesterday that keeping an “extended period” stance on almost zero-rates could raise the risks of a Japan-like economy.  Fisher noted that the Fed will neither tolerate inflation nor deflation.  Fisher also noted that fiscal and regulatory uncertainty act as a major roadblock to economic growth.

Drawing the comparison of a Japan-like economy will not exactly bring about the greatest cheer.  This morning’s GDP figure is not going to do much for the inflation camp, but it is not the case of big deflation either.  Maybe we are just in a period of ‘stable prices’ rather than a period of wildly higher or wildly lower prices.  Every economist and every pundit is still of course just speculating.  That includes yours truly.  After all, how can you fully predict what has not yet happened?

David Zervos of Jefferies recently issued a 60-year analysis of deflation.  While the 1970′s period was left out for its inflationary period, Jefferies shows the CPI data in its purest form without using any of the “ex” numbers that confuse the data on real world prices.

50s – 2.25 (2.24)… 3.3% average 10-Year Yield
60s – 2.53 (1.79)… 4.7% average 10-Year Yield
80s – 5.22 (3.47)… 10.6% average 10-Year Yield
90s – 2.93 (1.24)… 6.5% average 10-Year Yield
00s – 2.54 (1.14)… 4.4% average 10-Year Yield

Zervos noted, “It looks like current 10 year yields at 2.90% cannot even find value in a 1950s world with inflation some 30bps lower than the past decade…. there are very few signs of deflation and 10 year yield are pricing in excessive (and unfounded) risks of deflation. Something has to give and I’m guessing its 10 year yields.”

Barry Ritholtz of “The Big Picture” blog wrote yesterday that deflation is a fact and that a rise in Treasury yields will be the warning sign of inflation down the road.  Forbes took the opposite stance and said that deflation fears are overblown.

Deflation is a period of contracting prices.  In short, it is the theoretical race to zero in prices.  It also leads to cash hording when you know that the same goods will cost less a day later.