Certainly when you look today, you will see a strong case for deflation: a weak consumer, in both the US and Europe, rising unemployment, excess capacity and debt problems everywhere (an example of one of many arguing the deflation case can be found here).
Does that mean that inflation is dead? Not quite. Shadowstats’ CPI figures show that their alternate CPI is north of 9%:
What kind of inflation?
The question shouldn’t be one of inflation or deflation, but what kind of inflation given the deflationary landscape. Scott Grannis at Calafia Beach Pundit showed that there is inflation in services but deflation in durable goods:
To that analysis, I would add “inflation in raw materials”. As I wrote before:
A portfolio that relies on commodity and commodity-linked equities would be an effective inflation hedge under such a scenario. However, portfolios that rely on fixed income based solutions, such as inflation-indexed bonds like TIPS or even yield steepener trades, may be less effective as these kinds of inflationary signals may not show up as well in those markets.
Timing the inflation/deflation trade
I think that another reason that many market participants are confused about the inflation vs. deflation debate is the degree of macro-economic volatility that we are observing. While it is true there is a great degree of volatility in the economic outlook, investors can profit from that volatility with a timing system such as the inflation-deflation timer model, which is currently showing a neutral reading right now.