Follow up to the blog post of January 22, 2015

by Laura Ehrenberg-Chesler on February 3, 2015

in Commodities,Geopolitical,inflation/deflation,interest rates

In the Monday edition of our research from Ed Yardeni, he once again discusses the topic of the lack of inflation, and some of the forces at work that could actually be causing deflation.  Mr. Yardeni labels the forces at work as the “four horsemen of deflation”.

“Four horsemen of deflation. Previously, I’ve discussed four deflationary forces. The first is globalization, which has increased global competition, helping to keep a lid on both price and wage inflation despite the resulting increase in the number of consumers. The second is technological innovation, which through the process of “creative destruction” constantly puts downward pressure on profit margins. The third is demography: As longevity increases, aging populations tend to be less prone to inflationary buying binges. The fourth is ultra-easy money, which has boosted debt-financed supplies more than debt-financed demand.

 “The first two points are self-evident, though I’ve discussed them often in the past. To support the third point, I have previously shown the nifty correlation between the Age Wave in the US and both inflation and the bond yield. As the percentage of the population that is 16-34 years old has declined since the early 1980s, so have both inflation and the bond yield. The fourth point is best seen in the demise of the commodity super-cycle, which has become especially obvious since last summer, when the prices of iron ore and crude oil started to plunge. Now other industrial commodity prices are doing the same.”

These four “horsemen”, along with global and geopolitical turmoil, may continue to pressure our Treasury rates for the rest of the year.

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