January 06, 2003

As the year comes to an end it is customary for economists to divine and publish their outlooks and forecasts for the coming year. A simple projection of the recent trends suggests that the economy will continue improving in the coming year. The resurgence of the stock market during the beginning of the fourth quarter seemed to confirm the outlook. Unfortunately as the year came to an end the stock market began faltering. People began to worry about some real as well as some imaginary threats. For example some people have been arguing that the deflation chatter was not consistent with what was going on in the markets. They pointed out that during 2002 in addition to a dollar decline, oil and gold prices rose better than 60% and 25% respectively. Those people worried about inflation have pointed out that in the past these three things have signaled inflation. So which one is it inflation or deflation?

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