For those who continue to insist that the 3 year long spike in commodities is only a passing phase, consider the following:

The world’s oldest
regularly published price index comes from The Economist. Since October 2001, their dollar-based
industrials index has risen by 76%, mostly fuelled by Chinese demand for raw
materials and, in large measure, the weak dollar.

In real terms,
industrial commodity prices are a mere 30% of their value in 1845:

The Economist’s industrial commodity-price index

Cfn396_1

This raises an intriguing question:  Seen from a longer term perspective, is the recent rally merely a counter-trend move within the longer downtrend channel?   Or, is this the start of a secular bull market as competition for scarce resources, with 2 billion people in China (along with a billion people in India) as the key competitive drivers?

The Economist notes:

"Over the years our index, published among our economic indicators each week (see article), has been revised many times, with new commodities being added and others dropping out. This week it has again been rebased. The index now takes 2000, not 1995, as the base year and the weights for each commodity are based on the value of world imports in 1999-2001 (treating the European Union as a single market). The index, made up of 25 commodities, excludes oil and precious metals."

Hence, this shows the inflationary impact of demand from China, without Oil and without the doomsayers accumulation of Gold. While these commodities are priced in dollars, the claim that inflation is contained seems disingenous.  Unless your definition of contained inflation, like some  Fed Governors I could mention, merely means "not runaway 1970′s style hyper-inflation."

The Economist’s commodity-price index

Cin412_1

Foods now account for 56% of the all-items index, slightly down from before, while the share of industrials has risen to 44%. Wheat and coffee still have the biggest weights in the food index. But thanks to falling prices, sugar now accounts for only 6.6%, half its previous weight. Aluminium makes up almost half of the metals index. Here are the new weights and back figures (monthly and quarterly) for the indices.

One caveat, however: Recognizing that significant inflation exists does
not auomatically require action from the Fed. Indeed, they have a hard
enough time managing the U.S. economy; I am less certain they would be
any better at managing China’s economy, either. Especially ocnsidering that China is simulataneously the source of the World’s Deflation and Inflationat the same time.

How can one country simulataneously cause both Deflation and Inflation? The source of Deflation is due in large part to the labor arbitrage China has engendered, along with a commensurate extremely low cost production of goods. Call it the Wal-Mart effect. Inflation is simply due to the insatiable appetite China has for raw materials, as they industrialize what was a mostly agricultural nation of 2 Billion people (2010 projected, present: 1,298,847,624) into an industrial power house.


>

Source:
160 years on: It is time to rebase our commodity-price index
The Economist print edition, Feb 10th 2005
http://www.economist.com/markets/displaystory.cfm?story_id=3651836

Category: Commodities, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “The Economist ReWeights its Commodity-Price Index”

  1. Dinesh Vadhia says:

    Why is everyone stating that China’s population is 2 billion? It is approximately 1.3 billion.

    Dinesh

  2. spencer says:

    When you look at commodities as a share of total costs of final output they are a very small share.

    What we are seeing so far is firms absorbing rising raw material costs and offsetting it with low labor costs. Consequently, to date higher commodity prices are not showing up in final prices. Consequently, higher commodity prices are not inflationary. That could change, but so far it has not.

  3. China is the Source of Deflation and Inflation

    Link: The Big Picture: The Economist ReWeights its Commodity-Price Index.China is simulataneously the source of the World’s Deflation and Inflation — at the same time. How can one country simulataneously cause both Deflation and Inflation? The source …

  4. Catching my eye: morning A through Z

    It’s a busy morning in the blogosphere and I’ve got a lot to show you. Here’s what’s caught my eye this morning: Ann Althouse transcribes Pat Buchanan’s critique of the Bush approach to the War on Terror from Meet the…

  5. Catching my eye: morning A through Z

    It’s a busy morning in the blogosphere and I’ve got a lot to show you. Here’s what’s caught my eye this morning: Ann Althouse transcribes Pat Buchanan’s critique of the Bush approach to the War on Terror from Meet the…

  6. godement says:

    Gee, from 1.3 to 2 billion inside six years now, what do you think they are, rabbits?

    When quoting figures, it is always useful to do a quick reliability check…

  7. China is the Source of Deflation and Inflation

    Competing trends: which will prevail? Link: The Big Picture: The Economist ReWeights its Commodity-Price Index.China is simulataneously the source of the World’s Deflation and Inflation — at the same time. How can one country simulataneously cause bot…

  8. Shawn says:

    Hey there, you have a good site here. Very interesting.

    Comment on recent capital market development:

    NASD and Bloomberg have just launched two new indices for the secondary US corporate bond market, called the NASD-Bloomberg US Active Corporate Bond Investment Grade and High Yield Indices. Look for the daily prices and related info on http://www.nasd.com. Now the US bond market for corps will be a lot more like equities is. Thanks, Shawn