One unique characteristic of the past two decades is the more than 30% decline in the prices of durable goods. Outside of durables, prices of just about everything else have been rising. The decline in durable goods prices began in 1995, which not coincidentally was about the time when China pegged its currency to the dollar (after devaluing it by one third the year before) and launched its export boom. We have China to thank for deflating the prices of most of the durable goods we enjoy these days. That's "good" deflation, since it's not monetary in origin, but rather the result of a huge increase in the productivity of the Chinese economy which has ended up benefiting everyone all over the world.
Personal computers are one very obvious source of durable goods deflation. Since the end of 1997, the BLS calculates that the prices of personal computers and peripherals on average have declined by about 95%—which works out to an annualized decline of 16%. Most of this decline is the result of hedonic pricing, which means that although actual prices haven't declined by anywhere near 95%, if you adjust for the increasing quality, capacity, and capabilities of personal computers and such, then prices have effectively declined by 95%. Since 2010, prices have been falling at an annualized rate of about 8% per year.
The Producer Price Index was flat in August, but up a little more than 2% over the past year. No sign of deflation here.
The dollar's recent 5% rise vis a vis the Euro owes a lot to the fact that the Fed is getting ready to tighten policy, whereas the ECB is trying hard to ease policy further. those expectations are being reflected in German 2-yr yields, now -0.06%, and U.S. 2-yr yields, now 0.53%. The first of the two charts above shows the history of 2-yr yields, while the second shows the spread between the two and the value of the Euro, which have been highly correlated.
The chart above provides convincing evidence for why the Fed is likely to pursue tighter policy than the ECB. U.S. industrial production has been rising strongly for years, whereas industrial production in the Eurozone has been relatively stagnant. The U.S. economy is fundamentally stronger than the Eurozone economy, so short-term U.S. interest rates are very likely to rise relative to their Eurozone counterparts.
The relative outperformance of the U.S. economy has been significant, and is reflected in equity prices. The S&P 500 has outpaced the Euro Stoxx index by 68% over the past five years. U.S. equities now have the added advantage of a strengthening dollar.
As measured by the difference between 10-yr Treasury yields and the level of Core PPI inflation, real yields have been in a declining trend for the past 30 years. This means that, in general, the effective cost of borrowing money for U.S. businesses hasn't been this low since the late 1970s. This is one reason why companies like Apple are borrowing money here to fund dividends and buybacks instead of repatriating overseas profits. Borrowing costs almost nothing, and they avoid double taxation on foreign profits.
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