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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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