Tuesday, January 18, 2011

One more commodity chart

This index of commodity prices contains a decent amount of crude oil and products, in addition to a variety of other industrial commodities. Since crude prices are still about one-third less than their mid-2008 highs, it is remarkable that this index is now at a new all-time high. That is a testament to the pervasiveness with which commodity prices have risen across the board.

Note that 100 on the chart marks the mid-Nov. '01 low for most commodities. And recall that over the course of 2001, the Fed dropped its funds rate target from 6% to 1.75%—a substantial easing move that was exceeded in magnitude only in 1982 and 2008. Easy money—which has been with us for most of the past 9 years—provided the spark which subsequently drove commodity prices to a 200% gain.


McKibbinUSA said...

Why not inflation? Consider Krugman's "monetary morality" argument:


Inflation can be good for some investors, depending on the situation...

Benjamin Cole said...

Come on inflation. According to the CPI, we have been in deflation for two years. The CPI, according to FOMC staffers, overstates inflation by about one percent.

Still, with unit labor costs falling, with rents dead in the water, how will we see inflation? 70 percent of business costs are going down or sideways.

Commodities are notorious for going up in price, spurring production, and conservation, substitution, then plummeting. We are in the up price arc now. I don't think these prices can stick--it is profitable to drill for oil at $40 a barrel. At $90, oil guys will make gushers of money (and good for them).

If and when we see inflation above 4 percent for several years straight, then maybe I will worry about inflation. In the meantime, I hope we have some old-fashioned boom times, good for all.

The worst mistake would be to do a Japan--fight even the hint of inflation, resulting in perma-recession.

Benjamin Cole said...


You say we have had easy money from 2001.

The CPI now is at 218, and was at 172 in 2000.

That works out to a 2.6 percent annual gain, straightline, a little less if you work out the compounding.

Subtract from that 1 percent a year, due to the fact the CPI overstates inflation by about one percent, accorfin tot he FOMC (a group deeply concerned about inflation).

Sheesh, we get down under 2 percent inflation over a 10-year period.

Do you suppose times have changed, and for the better? With less unionization, with fantastic technology, with more free trade, we are getting great productivity and deflation downdrafts? I think so--and surplus capital everywhere, financing new technologies.

I cannot fathom why 1.6 percent real inflation over 10 year means our policy has been too loose. That inflation rate strikes me as low.

Beware of following in the footsteps of the Bank of Japan.

Benjamin Cole said...

Oddly enough, the exchnage rate of the dollar fell sharply in two recent periods of American history: The second Reagan Administration, and the Bush jr. years. Krugman recently posted some interesting charts on this.

The dollar rose in the Clinton years, and steadied under Obama.

I don't know what to make of this, except that I am beginning to believe anything that a liberal or conservative American economist says is to be taken with a several bushels of salt.

Anonymous said...

Would you comment on the macro effect to the US of a rise in commodity prices?

Aren't we (the US) a net exporter of agricultural commodities? So overall the nation benefits from a rise food prices?

piefarmer said...

On net, higher prices are a negative. Here's a simple explanation. Only a fraction of the US economy produces agriculture (and therefore benefits) while everyone in the economy consumes agriculture (and is therefore harmed).