Thursday, March 3, 2011

Commodities continue to rise, inflation can't be far behind

These charts represent the two major components of the CRB Spot Commodity Index. They contain no oil or energy-related commodities—just basic inputs to a lot of manufacturing processes and very run-of-the-mill types of food. They are both rising strongly and are posting new all-time highs almost every day. As I've pointed out many times before, it cannot be a coincidence that almost all commodity prices began their current run (which was briefly interrupted by the financial crisis in 2008) in 2001, which also marked the beginnings of the Fed's Great Easing. That easing was followed shortly thereafter (Mar. '02) by a major dollar decline; since then the dollar has lost 25% of its value, and is now at an all-time low in inflation-adjusted terms against a large basket of trade-weighted currencies. Easy Fed, weak dollar, strong commodity prices: they all fit, and in that order. The natural consequence of this, if left unchecked for too long, will be rising inflation.


Benjamin Cole said...

Well, but commodities are becoming a much smaller fraction of total GDP. For example, we use much less oil per GDP than even just 20 years ago, and it shrinks every year.

Food costs (as Carpe Diem points out) are smaller and smaller fractions of household budgets over the decades.

Meanwhile, big ticket items keep going down in price.

Housing is cheap now. All commercial space is cheap right now--retail, industrial, office. Office space in downtown Los Angeles is renting for the same now it did in 1979. $3 a sf monthly for class A space.

Unit labor costs have been falling, through 2009-2010.

If housing costs are down, if commercial space costs are down, if labor is going down--where do you get inflation? On commodities?

The worst response now would be to do a japan--start fighting inflation when it is low single digits and the economy is still weak. The Japan perma-recession is a longstanding and thorough experiment in the hazards of tight money.

Oh, you can snuff out inflation. You can also drive wages, property markets and equities down for 20 years running. Is that worth it? I submit it is not.

The Nipponistas are the biggest threat to America today.

brodero said...

As far as inflation...can people
demand higher wages???...can i raise
the price of my house if i want to sell?? Now if i want a cup of coffee with a couple of tablespoons
oof sugar...

Benjamin Cole said...

The USA economy tends to undercut inflation. If cars prices go up, importers being in a lot more cars. If wages go up, workers pour across the border. If we need capital, it comes across instantly, by the hundreds of billions. Even services can be imported by the miracle of the Internet.

Where is the workforce today militating for higher wages? Where are houses shooting up in price? Where is the auto dealer saying, "Well, if you want to buy it today, there is a premium." Where is the commercial landlord who says, "Of course, there is a key fee also."

Ain't there Jack, and we are years from there.

QE3? Pout it on Bernanke, pour it on, pull out the corks, tips over the barrels, set the whole damn place on fire, and dance naked in the street.

A weak, feeble Japanese monetary policy is the last thing we need now.

Jeff said...

Steel, copper, oil, gold, silver, corn, cotton, cattle, etc. all look like Scott's chart of CRB Raw Ind Index.

Benjamin says "pour it on". I guess he went to the Joe Binden school of economics, "if we don't keep on spending we'll go broke".

We are going to be looking like Argentina...and not in "years". Start warming up Ben...'don't cry for me Argentina...'

dave said...

Inflation is already here, not coming, the dollar has already gone to hell.
What is coming is the inevitable adjustment of all prices to a new higher level.

The idea that if we don't include commodities and energy prices in our official inflation index that somehow their increases don't matter is nothing short of fradulent economics.

That's like saying if you don't count the tanks in the streets the riots in the mideast aren't really all that bad!

Bernanke should be held criminally liable for what he is doing to the country, no the world. Madoff didn't take anywhere near what Ben has stolen from every person who transacts in dollars and he is in jail.