Tuesday, February 14, 2006


What Do Commodity Prices Say About Inflation?

A Financial Times writer sees deflation in the air. "People refer to government fictions such as the PPI (producer price index) and CPI. And if they don’t support their theories they begin conflating the trade deficit into future inflation worries. The implication is that consumers are somehow getting 'choked' by inflation when the reality is quite the opposite."

"Let’s first look at the various soft commodities, such as wheat, soybeans and corn. Wheat futures, currently trading at $360, are significantly lower than their 10-year high of $750, reached in 1996. Wheat is significantly lower than even its five-year high, reached in 2002, at about $425."

"Soybeans were as high as $1,050 as recent as early 2004. Now they are at $584."

"Oats are at $191, down from a high of $280. Hogs are at $58.40, down from a high of $85. Got milk? In 1995 it was at $12.40. Now, it is $12.40."

"What about lumber? Hasn’t there been a huge increase in demand for lumber thanks to the 'bubble' in housing? One year ago lumber was at $460. Now it is $344. Its 10-year high was around $480, reached in 1996."

"Chains such as Costco and Wal-Mart driving mom and pop grocery shops out of business, it is only natural that prices are being cut at the grocery store. In mid-2005, Giant Eagle, from Pennsylvania, announced it was cutting prices on 3,000 items, increasing to 7,700 the number of items on which they have lowered prices this year. 'The supermarket industry today is being chipped away at by a large number of competitors,' Kevin Srigley, Giant Eagle’s senior vice-president of marketing, said at the time. 'To be successful long-term, we must reduce prices and maintain our fresh offerings and quality.'"

"Palladium, with industrial uses ranging from electrical components to automotive, perhaps one of the most important commodities from an industrial point of view, is at $288, down from a 10-year high of $1,100, reached in 2001."

"On a completely anecdotal note, what scares me most is wage deflation. I recently posted a job listing on internet noticeboard Craigslist. The job posted simply said, 'need a researcher. Knowledge of internet, investing, writing.' Of the 300+ responses I received at least two-thirds had higher degrees and most of the applicants had some experience at one of the big banks: Goldman Sachs, CSFB, Morgan Stanley and JP Morgan. So what was so great about this job? The wages; $12 an hour."

For lumber, look for prices to fall quite a bit. British Columbia is going to harvest a huge percentage of its forest due to an insect plague.
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