Monday, March 15, 2010

Commodity price update

This chart shows the Journal of Commerce Index of commodity prices (blue line), as well as four subcomponents of the index. The y-axis is set so that all indices are equal to 100 in mid-November '01, which is the point at which most commodity prices hit a multi-year bottom. It was also around that time that the U.S. economy pulled out of the 2001 recession. Gold prices had hit bottom in January of that year.

I think it's impressive that all types of commodities are in a rising price trend these days. Of particular note: textile prices, not typically subject to speculative frenzy or hoarding, are only 6% below their all-time high, which was registered early last December. Similarly, the prices of miscellaneous commodities (hides, rubber, tallow, plywood, red oak) are only 6.5% below their all-time high, which occurred in late 2003. A growing global economy and expansive monetary policy are driving a whole range of sensitive prices higher.

More evidence, I submit, that deflation concerns are misplaced. And more reason for the Fed to be increasingly worried about keeping short-term interest rates at zero.


septizoniom said...

substitute "impressive" with "alarming" and you have a good post here. tone down the cheerleading of bad monetary policy.

Scott Grannis said...

Rising commodity prices may be due in part to bad monetary policy, and I would be the last person to discount that possibility. But there's no way to know for sure, and in the meantime I think it's important to highlight the growing body of evidence that argues against the possibility of deflation. Deflation is still very much on the minds of a lot of people, especially our Fed governors. The first step to recognizing inflation is realizing that deflation is becoming increasingly very unlikely.