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ISM: what deflation?





This charts shows the results of a survey of purchasing managers from manufacturing and service sector industries regarding how the prices they are paying compare to the prior month's prices. Today's reading of 61.5 for the prices paid by manufacturing industries implies that 61.5% of those surveyed reported paying higher prices in December.

This is most definitely not the stuff of which deflations are made. Despite the huge amount of "slack" that supposedly exists in the manufacturing sector (capacity utilization rates, according to the Fed, are only 71.3%, a level that was exceeded only in the depths of the 1982 recession), a clear majority of firms are seeing, and paying, higher prices for their inputs.

I still see great numbers of analysts worrying about the risk of deflation, despite the Fed's extraordinary efforts to avoid such an outcome, and despite mounting evidence that a lot of prices are rising. I would strongly recommend scratching deflation from your list of things to worry about. Doing so reveals a distribution of expected returns for all manner of risk assets that is strongly skewed to the positive.

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