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Tuesday, May 25, 2010

INFLATION? COMMODITY PRICES JUST HIT AN 8-MONTH LOW

The past few weeks have been tough on the "inflation is coming" argument.

One of the central investment questions of our time is: "Is the U.S. government's crazed spending going to stoke inflation and higher prices? Or is the consumer so tapped out that he can't buy anything… and is a long slog of deflation on the way?"

We can monitor the potential inflation problem by watching the CRB index. The "CRB" is the world's most widely followed gauge of raw-materials prices. It tracks price trends in energy (crude oil, natural gas), food (wheat, cattle, hogs, sugar, coffee, corn, soybeans), and metals (copper, silver, gold, platinum).

The CRB suffered a huge plunge during the 2008 credit crisis. This plunge bottomed around 200 in early 2009. The CRB staged a rebound into the 275 area… then entered "stall mode," trading sideways for nearly a year. And in just the past few weeks, the index hit its lowest low in about eight months.

Sure… the government's giant E-Z-Credit program will eventually stoke inflation, which will drive up the nominal price of things. But in the here and now, we have to note that prices are falling… not rising. Until the CRB resumes its climb, we have to ask, "Inflation? What inflation?"

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