Tuesday, March 23, 2010
Commodity prices continue to rise. This measure, the CRB Raw Industrials Price Index, is now only 4% below its all-time high, which was set in May '08. Note that this index contains no energy prices, and its components (see the bottom part of the chart) are not commodities typically subject to speculative activity, since they are not traded on futures markets. Are the Chinese hoarding hides? Tallow? Wool Tops? Resin? I seriously doubt it. These prices are up because the global economy is growing, demand is strong, and monetary policy is accommodative. Accommodative monetary policy does just that: it accommodates increases in sensitive prices such as these.
The message here bears repeating: deflation is not happening. Deflation is when almost all prices decline. Here we have a basket of industrial commodity prices that have risen 136% from their Nov. '01 lows, or almost 11% per year on average, and they have risen some 60% since the lows of late '08. This, during a time when conventional wisdom (including the inflation models favored by the Fed) has consistently viewed deflation as a major threat, primarily because the economy has been operating with a significant degree of "resource slack." Somebody forgot to tell the commodities market that surging prices were not supposed to be happening.
My takeaway from commodity prices: the risk of deflation is minimal; inflation risk is rising; and the outlook for the economy is much better than the "new normal" crowd would have you believe. And I say that even as I lament the passage of the healthcare bill, which means more government control over the economy, less efficiency, and lower average standards of living than we could have enjoyed if a free market approach to healthcare reform had been used.
Posted by Scott Grannis at 7:02 PM