Another unpleasant milestone of sorts: this index of industrial metals price hit a new all-time high last week. The commodity price rally is not over, it would appear, and it is likely being driven by a combination of strong global demand which exceeds the capacity of commodity producers to meet, and accommodative U.S. monetary policy. The latter is playing a more important role these days, as the dollar continues to slide. Importantly, I note that metals prices are still well below their 2007-8 highs when priced in yen, euro, swiss francs, or sterling. Metals prices are relatively strong when compared to their historical ranges, but the bigger news is that the dollar is exceptionally weak. This can only aggravate inflationary pressures in the U.S.
Mark Perry had an interesting post recently re inflation. He pointed out that wages are soft, eggs are down, natural gas is down, housing is down--in other words, the basics for a general inflation are not in place. There are offets to headline inflation in oil and some commodities.
ReplyDeleteThis suggests if we fight the current "inflation" with tight monetary policy, we will slip in Japan-style perma-gloom.
I consider this the biggest threat to American prosperity today.
Scott,
ReplyDeleteI am interested in your response to Mark Perry's post on inflationary pressures today re: housing and wage deflation. If, as you have said in previous posts, we can't have deflation if some prices are going up (ie deflation means all prices are falling), how then can we have inflation if some prices are falling? Doesn't your logic on deflation apply to inflation?
Inflation or deflation never hits everything evenly. It always trickles thru different items at different times.
ReplyDeleteSince 2000/2001, how does anyone explain "inflation" in the price of gold? Better yet, how about the price of silver?
Re inflation/deflation: Mark makes good points--some prices are indeed falling. I don't think that rules out inflation, however. In a 5% inflation world I imagine there would always be some prices declining. But boost inflation high enough and all prices, or nearly all, should be rising.
ReplyDeleteI think that gold, commodities and the dollar--if reinforced by a very weak currency and a central bank hell-bent on getting inflation to go up--are excellent leading indicators of a more generalized inflation. I would go further and say that a falling currency is a sure-fire recipe for inflation. Sooner or later all prices will rise if the dollar keeps falling vis a vis other currencies and against objective standards such as gold.
Mark Perry has another post that cites a Federal Rserve Bank of Chicgo paper. The paper concludes
ReplyDeleteConclusion
"The modest dependence of policy
on energy and other commodity prices implied by our analysis is
not surprising. The shares of firm
costs accounted for by energy and
commodities are not large and,
in fact, have fallen over time.
Moreover, at least in the case of
oil, price increases tend to
slow the economy even without
any policy rate increases...."
I wonder if the Allan Meltzers of the world are just getting old, or stuck in partisan dogma.
We have to go with what works, not what fits ideological purity tests, or partisan sentiments.
I don't think throwing money at social problems works, anymore than I think throwing money at perceived international threats works--and both contribute to deficit spending.
I don't think tight money works, especially now.
BTW, some harrowing figures on federal government employment:
Defense: 3,000,000
Veterans Affairs 235,000
Homeland Security 208,000
Treasury 115,000
Justice 112,000
Energy 109,000
USDA 109,000
We also have
HUD 10,000
Labor 17,000
HHS 67,000
Why do I say harrowing? Does anyone really expect either party, inclusing the Republicans, to seriously hack away at the numbers on this list?