Last week it looked like consumer prices are starting to break down: the core CPI turned negative (over three months) for the first time in decades. And small businesses seem gloomy about the economy, even as the recovery strengthens. What’s going on?

The two items are linked. When the real estate bubble burst a lot of banks lost so much that it threatened their solvency. To stay in business they had to raise cash and reduce risk, and they did that by cutting back on small business loans. So while we’ve cycled from recession to recovery, this has mainly helped larger companies.

That’s led to a situation where small businesses are hurting even while the economy is getting better, and employment is only slowly improving. Since small companies are the biggest employers, the lack of jobs is pushing down on prices.

While this is troubling, it’s nothing to panic over. As the economy slowly recovers, this does filter through, and prices will gradually move up. But inflation and higher interest rates aren’t likely to take off any time soon.

The economy seems like it’s “Waiting for Godot” here. Eventually, unlike the play, a full recovery will arrive.

Douglas R. Tengdin, CFA
Chief Investment Officer
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