- The Big Picture - http://www.ritholtz.com/blog -

The Economist ReWeights its Commodity-Price Index

Posted By Barry Ritholtz On February 14, 2005 @ 6:11 am In Commodities,Economy | Comments Disabled

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 [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 [2], 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 [3]), 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 [4]

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.


160 years on: It is time to rebase our commodity-price index [5]
The Economist print edition, Feb 10th 2005

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/02/the-economist-reweights-its-commodity-price-index/

URLs in this post:

[1] Image: http://bigpicture.typepad.com/photos/uncategorized/cfn396_1.gif

[2] scarce resources: http://bigpicture.typepad.com/comments/2005/02/chinas_oil_grab.html

[3] article: http://www.economist.com/markets/displaystory.cfm?story_id=3650872

[4] Image: http://bigpicture.typepad.com/photos/uncategorized/cin412_1.gif

[5] 160 years on: It is time to rebase our commodity-price index: http://www.economist.com/markets/displaystory.cfm?story_id=3651836

Copyright © 2008 The Big Picture. All rights reserved.