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Recent strength in commodity prices highlight the fear that inflation is
about to surge. However the concern is based not just on the gains in
metals prices, for example, but on a broader array of potentially
inflationary indications.
1) Real economic growth amongst
OECD countries has doubled to (a still moderate) 2.5% versus 2001 and
growth elsewhere in the world is blistering. Chinese economic growth at
14% is up from 4% in 1999 and growth in India has nearly doubled to 8%
from a 2001 low of 4.5%.
2) Though US money growth
recently has declined, the five year growth rate of 6.3% is triple the
growth of ten years ago. Relationships between money and inflation are
not what they used to be, but financial liquidity will always be viewed
as integral to the equation. The issue is examined by the Federal
Reserve Bank of St. Louis in Monetary Instrument Matters.
3) Energy prices remain
elevated. Oil prices are more than 20% higher than last year's average
which rose 53% from 2003 and the cold weather that has gripped much of
the US has recently pushed prices up further. Most notable has been the
spike in natural gas prices which yesterday were over $14/mmbtu, a rough
doubling of last year's level. Crude oil prices also rose over $60/bbl.
for West Texas Intermediate for the first time in a month. That rise
along with a rebound in the demand for gasoline promises an end to the
recent fall in retail gasoline prices. (Gasoline has a 3.9% weight in
the Consumer Price Index, electricity has a 2.4% weight and natural gas'
weight is 1.3%.).
· For the latest Short Term Energy
Outlook from the US Department of Energy click here.
4) Gold prices recently surged
over $500 per ounce and into territory not plotted since 1981. During
the last twenty years there has been a fairly high 52% correlation
between the level of gold and the expected rate of inflation during the
next year. Most of that correlation, however, seems to reflect current
pricing power. Gold's correlation with next year's growth in the CPI has
been negligible. The late Jude Wanniski's thoughts on the Gold
Standard can be found here
and the Federal Reserve Bank of
Cleveland's 1998 research simply titled Gold Prices can be found
here. 
5) The latest jump in industrial commodity prices for many is the prima fascia indication of a pending inflation pickup, but the gain seems more to reflect better economic growth. In fact industrial commodity prices have had roughly a 50% correlation with the y/y change in factory sector output during the last ten years and only a 15% correlation with the change in core goods prices in the CPI. Though even here, individual performance has been mixed. Metals prices have recovered all of the early-year drop and on average are nearly double the 2001 low, the strength paced by a near four fold rise in copper prices during the last four years. Textile prices, however, are up just 10% over four years. Further obfuscation of the issue is provided by the strong 47% correlation between industrial materials prices and the change in the overall CPI.
6) An inflationary threat from rising food prices depends on how much meat is part of the diet since livestock & meat prices have rebounded strongly from the mid-year lows. That misses a near 60% price rise since 2002 which has been paced 40-50% gains in beef prices, 60% higher broiler prices and 50%+ gains in pork prices. Grain price increases have been relatively tame but even coffee prices are double the 2003 level. The latest Food Price Outlook from the USDA Food Institute can be found here.
