Inflation?

Now that most earnings have been reported and the better than expected earnings have caused some optimism, we will most likely spending the rest of August drifting lower in the Market.

There is a good reason for this. There are still significant issues that need to be monitored and as various groups and analysts point them out they will tend to keep money on the sidelines and induce profit taking.

We still have high unemployment and many foreclosed houses as well as underutilization of our economic capacity.

The adjustment to a smaller economy is still ongoing. During the recession the economy has contracted by about 15%. Under even the most rosy scenario, the growth rate will take years to regain that amount. In fact in the non-Government sector the contraction has been even greater.

This slack in the economy will continue to force lower prices as companies compete by being more efficient and productive and trying to grab market share. The first area of growth for most companies may very well be in exports.

One area that shouldn't be a concern for this economy is inflation. It will take many years before the demand will push prices up. Now, the value of the dollar may decline in respect to other currencies and imports may get more expensive, however, it will be very hard for these price increases to be passed on to consumers, forcing companies to continue to improve efficiency.

Bottom line is that supply and demand are the fundamental rule for pricing and we have much more supply than demand and will have it for quite some time.