Thursday, February 5, 2009

Deflation Worries Easing?

Paul Krugman posts a chart that he believes shows a strong relationship between an output gap and deflation, while Paul Kedrosky implies that same chart shows randomness. So which is it... inflation or deflation?

CPI swap expectations have moved from north of 3% as recently as last May to negative (i.e. expected deflation over 2 and 5 years). Since mid-December, they are all beginning to reverse course. In other words, the market can't figure it out either.