Joseph G. Carson

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A super-fast rise in commodity prices is underway. It should not be a surprise that as the world economy re-opens, commodity prices start to rise to reflect more robust demand conditions. But what has been surprising is the speed and breadth of the increase.

The current commodity cycle shows an economic cycle's characteristics underway for a few years, not just getting started. That creates the potential for a quicker cost-push price cycle for products that coincides with an uptick in service prices, resulting in a lift in general inflation sooner and by more than what is currently expected by the markets and policymakers.


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Manufacturing & Commodity Cycle 

The Institute of Supply Management (ISM) reported that its composite index of prices for the manufacturing sector increased four percentage points to 86%. That represents the highest reading since July 2008. Although numerically the same, the economic and commodity price environments between 2008 and 2021 are fundamentally different.

February 2021 represents the early months of an economic recovery, while in 2008, the economic cycle which had been running for several years had already turned down. Also, high oil prices dominated the commodity cycle of 2008. Oil in July 2008 averaged $133, a record high and nearly double year-ago levels. In 2021, ISM"s February report listed 50 commodities rising in price, and the cost of oil was $59 a barrel, up from $50 one year earlier.

Broad-based commodity cycles have more significant momentum and staying power, unlike those driven by a single item, such as the case of 2008.


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The sharp and broad-based rise in commodity prices is evident in the Bureau of Labor Statistics (BLS) producer price report. Prices for crude goods, excluding food and energy, have risen 25% in the past year. Other than the sharp bounce in 2010, following the record plunge in 2009, the recent 12-month increase in core crude prices represents the most abrupt and substantial increase for the start of an economic recovery in 50 years.

Consumer products represent a little more than a third of the basket of goods and services that make up the consumer price index. But products (or goods) are the cyclical component, and any uptick in prices would coincide with upward pressure on service prices.

In February, the ISM price index for the service industries jumped 7 points to 72%. The ISM service sector survey started in 1997, so it does not have its brother's (manufacturing survey) long history. Nonetheless, in the past 25 years, no business cycle started with a higher price index reading for the service sector.

The price information coming surveys of manufacturers and service firms paint a broader uptick in general inflation, much more than what expressed in Federal Reserve officials' future price expectations. Based on current trends, consumer price inflation could easily top 3% in 2021. And while policymakers may characterize the inflation uptick as transitory, broad inflation cycles are not transitory and require monetary tightening to reverse.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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A super-fast rise in commodity prices is underway. It should not be a surprise that as the world economy re-opens, commodity prices start to rise to reflect more robust demand conditions. But what has been surprising is the speed and [...]

Super Fast Commodity Price Cycle Is A Harbinger Of Sudden Jump In Inflation

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Starting March 1, The Reserve Bank of New Zealand (RNZ) will consider the impact on housing prices when it debates monetary policy decisions. In doing so, RNZ becomes the first central bank to acknowledge that monetary policy decisions could influence asset prices at times adversely---lifting valuations far beyond fundamentals.

RNZ argues that the inclusion of house price sustainability fits in with their financial stability mandate. RNZ would be using prudential tools – like loan-to-value ratios, bank stress testing, and capital requirements against particular types of mortgage lending---when it decides whether monetary policy action is needed to "ensure house price sustainability."

News that RNZ now includes asset prices in its policy deliberations has been ignored or overlooked by most. Critics may say it's a small country, and their approach to monetary policy should have no carryover or import to what others do.

But that would be wrong. RNZ pioneered the inflation-targeting framework, introducing this policy regime in 1990; since then, it has been adopted by central banks worldwide.

One would think that the central bank that created and has been using the inflation-targeting framework the longest would know a lot about the pros and cons of this approach more than anyone else. RNZ has learned, as have other central banks, that a simple inflation-targeting rule to conduct monetary policy is not easy or without unintended consequences.

Boom-bust credit and asset cycles have been two of the unforeseen side effects of inflation targeting. In the US, boom-bust asset cycles, linked directly to easy money policy and the promise to maintain it for an extended period, triggered the last two recessions.

Central banks have for decades struggled with how to incorporate financial stability issues (i.e., unhinged gains in asset prices) within the structure of the inflation-targeting framework. The decision by RNZ puts financial stability as a co-equal to that of price stability. It would be wise for other central banks, including the Federal Reserve, to consider the actions by the RNZ.

Unfortunately, the Federal Reserve does not appear to be on the same page. Unlike the RNZ who is now monitoring monetary policy influence on asset prices, the Fed adds fuel to the asset price boom.

When testifying before Congress last week, Mr. Powell stated, "The housing sector has more than fully recovered from the downturn." That is an understatement. The housing sector is booming, evident with record-high prices, following double-digit gains in 2020, and sales of new and existing homes and permits to build new ones at the highest levels since the housing bubble mid-2000s.

But even after acknowledging the robust housing sector, Powell said the Fed would continue with mortgage-back securities purchases providing more monetary fuel to a red-hot sector.

Senator Pat Toomey, the Republican senator from Pennsylvania, suggested to Mr. Powell that the Fed's easy money policy contributes to "bubbles," citing rapid increases in real estate, commodities, and other assets. Mr. Powell admitted, "There is certainly a link," but cited other factors as well.

With asset prices at record levels, the RNZ and the Fed employ diametrically opposite policies to ensure price and financial stability. Who is right? My money is on the tiny central bank on the other side of the world.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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Starting March 1, The Reserve Bank of New Zealand (RNZ) will consider the impact on housing prices when it debates monetary policy decisions. In doing so, RNZ becomes the first central bank to acknowledge that monetary policy [...]

Pioneer of the Inflation Targeting Adds Asset Prices to Its Framework, While The Fed Adds More Fuel

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Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

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Andrew Cates

The US dollar has rapidly become the central focal point for investors grappling with the fallout from recent US trade policy shifts. As markets absorb the economic and geopolitical implications of a more confrontational US trade stance, attention has turned squarely to the dollar—not just as a barometer of financial sentiment, but as a potential transmission channel for broader global instability. Its role at the heart of the international monetary system, coupled with the scale of the US current account deficit and reliance on capital inflows, makes any significant shift in dollar dynamics a matter of systemic importance. With yield differentials, trade balances, and competitiveness all now under scrutiny, the dollar is increasingly where macro fundamentals, policy risk, and global capital flows converge.

This shift, moreover, carries profound implications. When trade policy becomes a source of financial volatility rather than a tool for economic rebalancing, it raises the risk of destabilizing the very capital flows that sustain the US external position. As the world's primary reserve currency, the dollar is embedded in the global financial plumbing—from trade invoicing to cross-border lending and portfolio flows. Sudden policy-driven movements in the dollar can reverberate far beyond US borders, tightening financial conditions in emerging markets, disrupting asset allocation globally, and undermining confidence in the predictability of the international monetary system. In this context, US trade wars are no longer just bilateral disputes—they are global macro events, with the dollar serving as the principal shock absorber.

Historically, the dollar has moved closely with interest rate spreads, as yield-seeking capital flowed into US assets. But the April US tariff actions—the dollar has weakened markedly even as the yield spread between the US and Germany has widened – see first chart below. This decoupling underscores a critical shift: capital markets are reacting not just to monetary policy, but to rising trade and geopolitical uncertainty. In other words, the exchange rate is now being driven as much by risk sentiment as by interest rate arbitrage.

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A second – more historical - dynamic, captured in the next chart, reveals an extraordinary correlation between the US real effective exchange rate and the potential GDP growth differential between the US and euro area. This raises the question: has dollar strength in recent years merely been a reflection of US growth leadership—or were capital inflows themselves helping to sustain this growth outperformance? In effect, the tail may be wagging the dog. Global investors have long allocated capital to the US, attracted by its macroeconomic resilience, technological leadership, and deep, liquid financial markets. But the danger now is that the trade war may disrupt this equilibrium. A sharp or sustained reduction in capital inflows could undermine growth, weaken the dollar, and trigger broader financial instability. Moreover, reversing this dynamic is not straightforward—barring a credible structural resurgence in European (or Asian) growth, the global investment landscape remains tilted toward the US.

250501AC2.jpg

Together, the first two charts offer a portrait of a dollar that has been propped up by relative growth leadership and yield advantages—but which now finds itself increasingly exposed to policy risk and a shifting investment calculus. If the dollar has been supported by flows into the US as the world’s best-performing developed market, the prospect of unilateral and escalating trade actions introduces a destabilizing new variable. This evolving pressure on the dollar intersects with a second, longer-term vulnerability: the deterioration in relative competitiveness. It is to this issue that we now turn.

The next chart examines relative unit labour costs across major economies since 2011. The US and China have seen a broadly similar trajectory, with steady increases in cost structures, while the euro area has remained flat and Japan has seen dramatic improvement. This suggests at face value, and from a cost competitiveness standpoint, the US is not uniquely disadvantaged vis-à-vis China. However, this parallel erosion of cost competitiveness is occurring at much higher nominal wage levels in the US, which blunts its ability to regain export share through tariff policy tweaks. The trade war strategy—absent a corresponding improvement in productivity or structural reforms—risks imposing costs without delivering material competitiveness gains.

250501AC3.jpg

This point is reinforced by the final chart below, which shows average monthly wages across countries. US labour remains dramatically more expensive than in peer or emerging economies. Even if China’s costs rise in tandem with the US, the global supply chain has ample alternatives. 'China plus one' strategies have been re accelerating, and the US remains structurally misaligned with low-cost production hubs. Tariffs aimed at reshoring supply chains are unlikely to deliver sustained gains unless accompanied by deep supply-side reforms, and risk further disincentivizing foreign direct investment if global firms perceive US trade policy as erratic or punitive.

250501AC4.jpg

At the macro level, these developments highlight the fragility of the US external position. The country runs a persistent current account deficit, financed by a capital account surplus. That surplus reflects foreign appetite for US assets, from Treasuries to equities to real estate. However, protectionist trade actions, if perceived as arbitrary or destabilizing, may eventually erode that confidence. The Trump administration’s April 2025 moves have already prompted questions about retaliatory measures, potential capital controls, and the role of the US dollar in a multipolar world. If investors begin to question the reliability of US policy—or the openness of US markets—capital inflows could further falter, and with them, the ability to fund the trade deficit smoothly.

The Dollar Under Strain: The US Trade War and Structural Fragilities

Paul L. Kasriel

The CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act was signed into federal law on August 9, 2022. The CHIPS Act provides various subsidies for the production of semiconductors in the US. Semiconductors are an integral component in numerous kinds of equipment, including defense equipment. A major impetus for passing the CHIPS Act was national security.

The encouragement of domestic semiconductor production seems to be coming to fruition. In the advance estimate of Q1:2025 real GDP, released on April 30, 2025, the annualized change in the production of real information processing equipment skyrocketed to 69.3%, as shown in Chart 1.

250430X1.jpg

Those who are in the economic forecasting “profession” likely had penciled in a large increase in their forecast of Q1:2025 information processing equipment in that there was a large increase (29% annualized)  in the production of semiconductors in the Federal Reserve’s Q1:2025 industrial production report (see Chart 2). The Federal Reserve also provides monthly data on the production of semiconductors. The monthly annualized percent changes in semiconductors are plotted in Chart 3. As you can observe, in both Q1:2024 and Q1:2025, the surges in semiconductor production were “front loaded” in the sense that January increases were much larger than the subsequent February and March increases. (I’ll leave it to reader(s) as to why I am highlighting the January 2025 increase.)

250430X2.jpg

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So, we might say “mission accomplished” in terms of the CHIPS Act stimulating the domestic production of semiconductors. But the current presidential administration has indicated that it wants to scrap the CHIPS Act and replace it with tariffs on imported semiconductors. If it ain’t broke, why fix it? Subsidies or tariffs – which one would be better for aggregate economic welfare? Tariffs on semiconductors would penalize all of the consumers of the end products in which semiconductors are a component. Moreover, domestic producers of semiconductors would have an incentive to raise their prices under the umbrella of higher-priced imports subject to the tariff. Government subsidies to semiconductor producers are not free. Current or future taxpayers will bear the cost of the subsidies. But should not the cost of national security be “socialized”? My bet is the cost of the government subsidizing the semiconductor sector is less than the cost of imposing tariffs on imported semiconductors. Hmm, this might apply to other things deemed important for national security such as steel and aluminum.

Good Bye Mr. CHIPS?

Charles Steindel

The Federal Reserve Bank of Philadelphia’s state coincident indexes in March were a touch firmer than in February, but not robust. In the one-month changes, West Virginia was on top with a .77 percent gain, while South Dakota, Indiana, Montana, and South Carolina were also up more than .5 percent. Nine states were down, with Connecticut’s .23 percent drop being the largest. Over the three months ending in March, five states were down, with Massachusetts off .48 percent (Connecticut and Rhode Island also showed declines, obviously suggesting some softness in southern New England). West Virginia was up 2.06 percent, and South Carolina, Montana, Indiana, and South Dakota also rising more than 1 percent. Over the last twelve months, Iowa and Michigan were down, and twelve others saw increases of less than one percent. No state had an increase higher than four percent, and only four were at or higher than three percent. Utah’s index rose 3.33 percent, while Michigan was down 1.48 percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .61 and 2.44 percent. Both measures appear to be a bit weaker than the state numbers.

State Coincident Indexes in March 2025

Viewpoints: March 2021

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Super Fast Commodity Price Cycle Is A Harbinger Of Sudden Jump In Inflation

Pioneer of the Inflation Targeting Adds Asset Prices to Its Framework, While The Fed Adds More Fuel