"Deflation" and "boom" are not two words that normally go together. They are almost like "sad happiness," "lo-cal donut." But in their very unlikely pairing they appear to do a good job of explaining the unusual economic and market environment that may lie ahead.It’s a term discussed this week by Cornerstone Macro analyst Francois Trahan to describe a rare condition in which a country’s economic activity rises but inflation falls. He believes that is the right interpretation of the Philadelphia Fed data released on Tuesday that showed output in the region up but prices paid falling, as shown in the chart below.
The improvement of the Philly Fed can be seen in part as a result of the stimulative effect of falling crude oil prices, and their ripple effect on the broad economy. The chart below, created by Cornerstone, shows the Philly Fed Index (green line) charted against the six-month percent change in the price of Brent Oil, advanced four months (gray) and inverted.
The oil price is advanced four months to show the lagged effect that oil has on economic activity. In other words, when oil falls in price it takes about four months for the change to have an effect on end users’ decisions....MORE