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Economy in Brief

Energy & Gold Prices Deflate
by Tom Moeller September 22, 2006

At $61.05 yesterday for a barrel of WTI crude oil, the price has fallen 21% from this past summer's peak of $77.00.That decline has been accompanied by a 38% decline in the spot price for unleaded gasoline to $1.51 per gallon from $2.42 in July.

A lessening of supply concerns seems to more explain the price drop. Demand for gasoline actually has strengthened of late with y/y growth up to 5.4% during mid-September, according to figures from the U.S. Department of Energy.

Natural gas prices similarly have fallen sharply with the spot price down to $4.67/mmbtu, off by nearly one-half from this past July's high. During September, the Edison Electric Institute reports that growth in U.S. electricity demand was negative 5-11% y/y.

Gold prices have followed suit with a 20% decline to $578.75 per ounce versus the May high of $725.00. Reduced concerns about future inflation certainly figure in the price decline. Federal Reserve Board action has left the level of the monetary base virtually unchanged since the Spring with y/y growth down to 3.3%, near the lows of the last four years.An additional indication of reduced inflation risk is the Treasury market interest rate yield curve which remains inverted between the 10 Year and Fed funds.

Other commodity prices similarly have lost steam. The JoC-ECRI index of industrial metals prices has been volatile in a sideways pattern since the Spring though textile prices recently firmed off a low July base. Lower lumber prices reflect the declines in housing starts & sales. The framing lumber composite from FIBER near $300/1000 board ft. is off by nearly one third from last year's high.During the last twenty years there has been a 35% correlation between the y/y change in factory sector industrial production and the change in the crude goods Producer Price Index less food & energy.

Inflation, Inflation Expectations, and Monetary Policy from the Federal Reserve Bank of Cleveland can be found here.

Monetary Policy in an Interdependent World from the Federal Reserve Bank of Cleveland is available here.

Weekly Prices 09/21/06 12/30/05 Y/Y 2005 2004 2003
Light Sweet Crude Oil, WTI  (per bbl.) $61.05 $61.04 -8.2% $58.16 $41.78 $32.78
Gold: Handy & Harmon (per Troy Oz.) $578.75 $516.00 24.1% $507.40 $443.40 $416.25
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