Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Commodity Price Inflation, What is Likely Impact in the United States?

Commodities / Inflation Nov 23, 2010 - 03:52 AM GMT

By: Asha_Bangalore

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleThe S&P GSCI commodity index has moved up 11.3% from a year ago on November 19, 2010 (see Chart 1).  The trade weighted dollar declined 1.2% from a year ago as of November 12, 2010.  The immediate inference is that the extent of gains in the commodity price index is larger than the decline of the dollar.  By implication, commodity price gains reflect more than the depreciation of the greenback.  


An increase in world demand for commodities is the other factor responsible for higher commodity prices.  The world is operating on two different gears - advanced economies on first gear and emerging markets on a significantly higher gear.   The two-speed world would entail that commodity prices have a differential impact in advanced economies compared with emerging markets. 

In the emerging markets, the sharp increase in overall inflation, partly due to higher commodity prices, should involve policymakers being concerned about higher inflation.  China has already addressed the inflation issue with higher reserve requirements as inflation data show a troubling upward trend (see Chart 2).  Price controls on food items in China are being considered and it should not be surprising if it is announced soon.

By contrast, in the United States, the Fed is concerned about a "low inflation" environment with vigorous discussions of how to prevent a deflationary situation.  The Consumer Price Index (CPI) rose 0.2% in October, with the Labor Department indicating that higher gasoline prices accounted for 90% of the increase in the CPI.  On a year-to-year basis, the CPI moved 1.2% in October.  The core CPI, which excludes food and energy, held steady in October, matching the readings of the prior two months.  The core CPI has advanced 0.6% from a year ago, the lowest mark for the entire history of the index.  As shown in chart 3, both inflation measures show a contained inflation picture.  Other measures of inflation also indicate a decelerating trend of inflation (see chart 4). 


  
Commodities and services make up roughly 40% and 60% of the CPI, respectively.  Both indexes show a decelerating trend (see Chart 5).  The movements of the commodities price index is closely linked to the behavior of commodity prices. 


Rising commodity prices, such as food and energy items, translate into higher prices for these items at the retail level but contained prices of services have provided a partial offset and held back overall inflation.  In recent months, the commodity price index of the CPI shows a more moderate gain compared with readings earlier in the year.  In recent weeks, the S&P GSCI index appears to have peaked on November 10 (see Chart 6)

Speaking about overall inflation, the question is whether rising commodity prices will seep into the rest of the economy and result in higher overall inflation in the United States and call for tightening of monetary policy.  In the United States, inflation expectations have risen since Chairman Bernanke spoke on August 27 indicating the possibility of the second round of quantitative easing.  But the upward trend of inflation expectations remains non-threatening (see Chart 7). 

There is no immediate threat of inflation given the large excess capacity in the U.S. economy in terms of factory capacity and the high unemployment rate.  Also, actual real GDP of the U.S. economy is far short of potential GDP.  In addition, labor costs also show a downward trend.  Charts 8, 9, 10 and 11 illustrate these aspects of the current situation in the U.S. economy. So, the upshot is that rising commodity prices are not a harbinger of higher inflation, for now.   

Asha Bangalore — Senior Vice President and Economist

http://www.northerntrust.com
Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Copyright © 2010 Asha Bangalore

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in