As expected, inflation is now retreating in the face of financial turmoil and economic contraction.
Consumer prices were flat last month, following a 0.1% decline in August, the Labor Department reports. Of the eight major components of the consumer price index, three posted declines (housing, apparel and transportation prices) last month. Among those that posted increases, food and beverage prices led the way with a 0.6% rise. Core CPI (which excludes food and energy prices) rose 0.1%.
The data doesn’t yet confirm that inflation has faded from the economic landscape, but that future’s coming. CPI’s 12-month change dropped to 4.9% last month, down from 5.4% in August. It’s likely that the annual pace of consumer inflation will show further drops in the months to come, courtesy of the slowing economy that’s probably headed for contraction if it isn’t already shrinking.
Looking for lower inflation is hardly a dangerous forecast these days. Commodity prices have continued falling in October, with crude oil prices falling under $75 a barrel yesterday in New York futures trading for the first time in more than a year. A number of other key commodities are under selling pressure as well.
The big unwinding of the last five years is underway and it’ll roll on for a bit. It’s an across-the-board correction and it’s driven by fundamentals and fear. The U-turn doesn’t surprise us since there was a bull market in virtually everything for several years running. If one trend’s possible, so is the other. Cycles are as old as civilization, although it’s the degree of the rotation that’s so shocking this time, although the shock is directly related to our capacity for focusing primarily on the recent past and thinking that’s true perspective.

For strategic-minded investors, the reversal of fortunes offers opportunity–eventually. For those who missed the commodity bull run, for instance, the chance to climb on board at greatly reduced prices now and perhaps in the coming months and quarters reveals itself once more. Emotion, however, will argue against the idea, as always. The crowd-pleasing elixir of going with the flow will prevent many from partaking in contrarianism until the all-safe sign has been flashing in earnest for a few years.
No doubt there’s a strong case for remaining cautious on all the asset classes save cash these days. Nothing wrong with that. Being a little late to jumping on the eventual rebound bus is no great tragedy. The same can be said for being a bit early. It’d be nice to call bottoms exactly, but that’s not an option for mere mortals.
Keep in mind that it’s easy to delay one’s opportunistic buying until the next wave of selling, and repeating the decision again and again. Bear and bull markets promote self-reinforcing behavior and so one must be careful of letting inertia in one’s decision making become a habit that no longer reflects strategic thinking.
Far better, then, to have a plan–a long-term strategic plan. Making a commitment to X number of asset classes with an eye on making multiple purchases over time, based on where absolute and relative value are highest, is a good start. Almost anything is better than sitting dazed and confused for months, which can turn into years if you’re not careful. Inaction has a tendency to turn into a long-term strategy if you’re not paying attention. That and 50 cents gets you a cup of coffee, although free advice is sometimes good advice.
There are no easy answers in managing risk portfolios. The threat of loss is always lurking, although the magnitude of the threat is forever in flux, in part because prices aren’t static either. That’s good news, even if it’s not obvious when you’re reviewing your 401(k) statement of late.