Deflation Around the Corner?

Consumer prices edged downward in June by 0.1 percent, according to the Bureau of Labor Statistics, following a 0.2 percent decline in May. That raises the specter of deflation (again), which is the bogeyman du jour for some economists.

July 19, 2010
By Dees Stribling, Contributing Editor

Courtesy Flickr Creative Commons user Beverly & Pack

Consumer prices edged downward in June by 0.1 percent, according to the Bureau of Labor Statistics, following a 0.2 percent decline in May. That raises the specter of deflation (again), which is the bogeyman du jour for some economists. Nouriel “Dr. Doom” Roubini has been beating that drum for some time, warning of the cleverly named “stag-deflation.”

The June decline, however, was mainly because of falling gasoline prices, which few would argue is bad for the economy. The core CPI, which leaves out volatile energy and food prices, actually went up in June by 0.2 percent. “The index for energy decreased 2.9 percent in June, the same decline as in May, with a decline in the gasoline index accounting for most of the decrease,” noted the BLS in a statement on Friday.

From the consumer’s point of view, other things continue to get more expensive, such as “a broad array of indexes posted increases, including shelter, apparel, used cars, medical care, tobacco and recreation,” noted the BLS. “These increases more than offset declines in the indexes for household furnishings and… for airline fares.”

Consumers Feeling Pretty Grumpy

The Reuters/University of Michigan’s Consumer sentiment index dropped precipitously in its mid-July reading, down nearly 10 points to a 66.5. That’s roughly to the same level as the index was during much of 2009, which hints that consumers are very irritable indeed, or many just a touch panicky. Both the expectations and current-conditions components showed roughly 10 point drops.

The drop is something of an enigma. Previously, drops of that magnitude were associated with dramatically bad events, such as the collapse of Lehman Brothers, Hurricane Katrina, and the September 11 attacks. The Wall Street Journal noted on Friday that the last time there was such a large a sentiment drop without a headline-grabbing bad event preceding it was in December 1980.

What gives? Those who remember the late ’70s and early ’80s know that it was a pretty glum run of years. Consumers didn’t need any particular shocks to go sour in those days; and maybe it’s that way now.

CRE Loans in CDOs See Delinquencies Rise in June

According to Fitch Ratings on Friday, delinquencies on commercial real estate loans in collateralized debt obligations (CDOs) were up in June, with the rate increasing to 12.2 percent, compared with 11.6 percent in May. Realized losses fell, however, to $39.4 million in June, with the disposition or resolution of various troubled assets.

All together, Fitch rates 35 commercial real estate CDOs that include roughly 1,100 loans and 350 securities. Asset managers repurchased $136.9 million worth of troubled assets in June, according to Fitch.

Wall Street had been entirely too giddy during the last few weeks for it to last forever, and sure enough on Friday the Street took a considerable hit on weak corporate earnings and reports of consumer malaise. The Dow Jones Industrial Average was down 261.41 points, or 2.52 percent, while the S&P 500 lost 2.88 percent and the Nasdaq declined 3.11 percent.