Deflation Ended Months Ago

In the two big currency areas, the U.S. and the euro area, the 12 month price inflation rate reached another low (In countries experiencing significant currency depreciation, like Sweden, no such tendency was to be found), falling into deflationary levels of -2.1% and -0.7% respectively.

However, it should be noted that this was entirely the result of the temporary deflation of late 2008 as you can see if you study the monthly numbers. Between July and December 2008, the U.S. CPI fell from 219.964 to 210.228, a 4.4% decline. Between December 2008 and July 2009 it rose by 2.4% to 215.351. Some of the decrease last year and some of the increase this year was seasonal, but most of it wasn't. As the brief period of deflation gradually disappears from the 12 month comparison, the 12 month increase will rise dramatically. Even if the CPI is unchanged for the rest of the year, the inflation rate will rise 4½ percentage points to 2.4%

Unlike Bob Murphy though, I don't expect the U.S. price inflation rate to rise to particularly high levels (i.e. not much higher than 2 to 3% or so. Perhaps somewhat higher but not much) within the next 6-12 months. The reason for that is that I rely on MZM rather than M1 as Murphy does. And while M1 has grown rapidly (at an annual rate of 18.5% between March and July) in recent months, MZM has increased only moderately (at an annual rate of 3.7% between March and July).

In other countries with higher money supply growth, inflation will likely rise to higher levels than that.