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If there is one question I have been getting most consistently from investors as of late, its ‘why do you think we see inflation in Q4?’…

Generally speaking, until macro numbers are on the tape, “private forecasters” won’t believe they are possible. Maybe that’s because groupthink is so dominant right now. Maybe it’s because you can’t get these forecasts with in a “one on one” with your favorite economist. Otherwise, I have no idea. This call isn’t that complicated.

When I measure risk, I measure ranges, deltas, and spreads. One way to measure the risk of reflation rotating into inflation in Q4 is through the delta of the Prices Paid component of the ISM Manufacturing survey. Last month I called this out as an eye opener. This month’s number is a flat out moon-shot (see chart).

A lot of economists are calling for perpetual deflation because that’s what the lagging indicators (reported CPI and PPI) are telling them. Looking at the smack-down of this chart from July of 2008 until the end of Q408’ will give you a great summary of what’s in that rear-view mirror.

At a reading of 55 for July of 2009, this horse has already left the barn. If these price levels hold, year-over-year inflation accelerating in Q4 is as close to a mathematical certainty as I can find. People have to pay for things in US Dollars – the Buck is Burning.

And Reflation’s Rotation is finally underway…


Keith R. McCullough
Chief Executive Officer

Reflation's Rotation: ISM Prices Paid - ISMCHART