Everybody seems worried about inflation at the moment. I had a bit of a discussion in some blog comments yesterday.
The inflation worry has been kicked off by a combination of rising food prices and China’s return to monetary tightening in October. At present, this looks to me like just another inflation scare — perhaps comparable to the one of 2008, when high Chinese inflation and commodity prices spooked the markets and the ECB even tightened rates. But I do not feel I have fully got my head around it, so am going to post a few charts to help me think.
I have made a simple indicator that compares the price of a commodity future today to the price 250 days ago, expressed as a percentage (there are around 250 trading days in a year; this method uses continuous futures so is not totally reliable, but it should give a fair impression). This chart shows copper and platinum on the top row and Brent crude and natural gas on the bottom row. Copper has picked up a little; platinum is slowing; and Brent is picking up. All are below their rates of inflation in the initial stages of the recovery. Is this cause for major inflation concerns? Click to enlarge.
Food prices are rising. This chart shows wheat and corn on the top row, soybeans and coffee on the bottom. These rises are due to poor growing conditions this year.
Several food commodities, however, fail to exhibit this pattern. This chart shows sugar and cocoa.
Most significantly, here is rough rice. No problem in evidence.
CPI inflation rates in the developed world (blue) remain low, except in the UK which has its own specific problems. Some emerging markets (red) also have low inflation. (Update: source: tradingeconomics.com
China is the big focus at the moment, but CPI inflation ex food does not look overly troubling (orange charts from Bloomberg
… although food inflation is accelerating.
China is tightening rates, partly to rein in its credit bubble and partly in response to inflation (chart from RBS via Alphaville
There is no sign of EM or commodity inflation in US core CPI, which remains at historic lows (source: FRED
Headline CPI and PPI (finished goods) also show little sign of acceleration.
On a first reading, the story seems to be this. Food price inflation has increased this year in those commodities that have been affected by the adverse weather. This has had an impact on inflation in some emerging markets, with China the main focus of the financial markets. There is as yet no evidence that rising EM prices are feeding into developed-world prices, and with EM authorities tightening monetary policy they may never do so. There has also been a rise in the oil price; but the Saudis have repeatedly said that if there is evidence of a shortage in the market they will pump more oil, which seems to put a cap on further oil price inflation. Copper and other industrial commodities continue to appreciate at a steady pace in response to the ongoing economic recovery.
Preliminary conclusion: Inflation scare. Markets may be volatile but trends will not change. But I think I am going to be walking around thinking about this for a while longer.
Update: More from Menzie Chinn on the subject of US inflation