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What Is Biflation?
By Mike Conlon | June 17, 2010
One of the economic terms du jour is biflation, which is a condition marked by both simultaneous inflation and deflation. This is becoming more and more significant as central banks around the globe grapple with how to set policy. Today’s US CPI figure is a perfect example of this.
The US Consumer Price Index showed a decline of .2%, yet the core rate rose .1% which both were in-line with expectations. We are most likely in a condition here in the US where we are going to experience commodity inflation, but housing deflation. It is important to pay attention to how the Fed will react to these figures. For years we heard that there was no inflation, yet every time you went to the gas station, you thought differently. You aren’t crazy; we’re experiencing biflation.
Retail sales figures in the UK advanced, though analysts are attributing it to the rise in sales of flat-screen TVs due to the World Cup. While yes, the Brits are crazy about their team, I think there is probably a little more to the story than just soccer.
The Euro is higher as well after a bond auction in Spain which sold the maximum set for auction. This flies in the face of the rumor about Spain setting up an emergency credit line, as the market devoured this offering showing confidence in the Spain and the Euro zone.
In the forex market:
Aussie (AUD): The Aussie has started lower this morning despite some risk-taking in the market. It is higher vs. USD, but lagging JPY. The latter trade could reverse today and was possibly a function of Asian stocks (particularly the Nikkei) being down today. In addition, the RBA said that they would likely only raise rates one more time this year, giving investors a reason to turn elsewhere.
Kiwi (NZD): So the Aussie’s loss is the Kiwi’s gain, despite consumer confidence figures which fell 3.2%. Nevertheless, the Kiwi is higher on initial risk appetite in the market.
Loonie (CAD): The Loonie is lower this morning taking its cues from oil, as it so often does. Oil is “lower” to $77.25, off yesterday’s highs of just under $78. In addition, Canadian wholesale sales fell .3%, vs. an expectation of a rise of .3%. So the Loonie is weaker across the board despite some of the risk appetite.
Euro (EUR): The Euro is higher this morning as a successful bond auction from Spain put rumors to bed and showed renewed confidence in the Euro zone.
Pound (GBP): Retails sales came in better than expected at .5% vs. an expectation of .1%, which is being attributed to World Cup soccer. However, I believe the economic story in the UK is a good one, as recovery and confidence in the new government is bolstering growth. In addition, the BOE said that they would most likely raise rates before selling bonds when they remove economic stimulus.
Dollar (USD): The Dollar is weaker this morning as CPI fell, but was in line with expectations. In addition, initial jobless claims came in higher than expected, posting a gain of 472K vs. an expectation of 450K. However, stock futures are higher as the market is becoming more conditioned to biflation, and increased jobless claims are almost an afterthought.
Yen (JPY): The Yen is mixed this morning, starting higher because the Nikkei was lower, but giving back gains as risk appetite is increasing. However, US dollar weakness vs. the Yen is apparent as the focus is off of North America (USD, CAD) this morning.
This morning is a bit of a mixed bag, with the market taking its cues from Europe and selling North America. Good news in the Euro zone and the UK are propelling those currencies higher, and stocks are initially higher here in the US as the market shrugs off deflationary numbers and a bad unemployment report.
The reason the CPI data doesn’t seem as important is because the market is getting used to the notion of biflation. I used to discuss this issue as the “tale of two economies”, but I suppose this term just tidies things up. However it will become important to both consumers and investors alike as this condition becomes more apparent.
However, I suspect we could see a US stock market sell-off today, as the market isn’t quite sure what to make of this.
Until then, take advantage of the market volatility!
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