Deflation – Nowhere to Be Seen

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Published : July 09th, 2012
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There are frequent claims that the US economy has entered a period of “deflation.” These claims are totally unfounded and are false. Deflation can only be a persistent state of general price decline. In fact, in examining price trends, the US is experiencing shocking price increases of over 15% per annum. To illustrate this, Figure 1 shows the Continuous Commodities Index, CCI over the past ten years.


Figure 1: Continuous Commodities Index (CCI) 2002-2012

The CCI shows there are periods of high inflation and brief periods of “disinflation”. “Disinflation” is a period when the money supply expansion slows but does not contract. An analogy of this is a car that can speed up or slow down but does not stop. When the car accelerates it is analogous to inflation, while the car slowing down is analogous to “disinflation.” Conversely, “deflation” would mean that the car stops and reverses. There is absolutely no sign of any reversal in the general trend of inflation.

The CCI is an index of 17 different commodities namely: Cocoa, Coffee ‘C’, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Live Cattle, Live Hogs, Natural Gas, Orange Juice, Platinum, Silver, Soybeans, Sugar No. 11, and Wheat. The index covers a broad range of industrial raw materials for the production of energy, food, metals, and textiles. The CCI composition remains unchanged since 1995 and so suffers no hedonistic massaging or adjustments, unlike the government produced Consumer Price Index, CPI, and Producer Price Index, PPI.

The index is equally weighted so it is the geometric mean of these 17 commodity prices. This means that the price of the CCI cannot spike due to an increase in price of just one or two commodities. For the index to rise 10% all 17 components would need to rise 10% or one component would have to rise 500%. If oil were to rise tomorrow to $400/bbl and all other 16 components did not change in price, the index would only rise by 10%. This means that the CCI is a stable indicator of price trends.

What can be seen from figure 1 is that the CCI has been in a rising trend for ten years as shown by the solid red channel.


 

Adrian Douglas


 

 

 

 

 

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Adrian Douglas is proprietor of the Market Force Analysis newsletter (www.marketforceanalysis.com). Market Force Analysis is a unique analysis method which provides reliable indications of market turning points and when is a good time to enter, take some profits or exit a market. Subscribers receive bi-weekly bulletins on the markets to which they subscribe. MFA also runs a Hotlist of Junior Mining Stocks which they consider will yield outstanding returns.
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