Thursday, October 2, 2008

Modest relief from lower commodity prices

Just to keep things in perspective: these charts use a semi-log scale on the y-axis to illustrate that the decline in commodity prices from their peak earlier this year has been relatively modest in percentage terms. Commodities might still be in a bull market, with recent declines simply a correction in an upward trend. Prices are down primarily because of concerns about a weaker global economy, but they may also have been pushed lower by a stronger dollar. The one ingredient lacking for this to be a true bear market in commodity prices, however, is tighter money. Monetary policy is still easy and dollars are still relatively abundant in the world, and that will keep commodity prices from collapsing.

If I had to summarize what's happened, I would say that the dollar is no longer extremely weak, just very weak; and commodity prices are no longer extremely expensive, just very expensive.

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