Wednesday, February 9, 2011

Using Commodity Prices to Predict Consumer Price Inflation

Okay. Here's the premise. We know what commodity prices have done in the last 10 years and we'd like to use that information to predict what the consumer price index will do in the future.

Click to enlarge.

As seen in the chart, commodities are running a bit hot. It's not the 1970s but it isn't exactly the 1990s either.

Let's make a new chart. We'll be comparing the previous 10 years of commodity price increases to the following 10 years of consumer price inflation.

Click to enlarge.

The key here is not the trend line. It is the lack of correlation. Knowing what commodities have done over the previous 10 years doesn't tell us anything about what the CPI does in the future. We might just as well be using ink blot tests to make predictions.

Just something to keep in mind. The rear view mirror can be mighty deceiving. Stare into it long enough and you are likely to form conspiracy theories.

December 8, 2010
Extreme Gold and Silver Price Suppression Could Signal an Imminent Financial Surprise

Referring to commodities in particular, Rogers said, “If the world economy gets better, commodities are going to go up in price because there are shortages. If the world economy does not get better, you should own commodities, because (central banks) are going to print more money. Real assets are the way to protect yourself.”

Although both gold and silver are well above their long-term inflation adjusted averages, their prices are being suppressed. As an added bonus, their prices cannot fall no matter what the global economy does. That's one heck of a theory. Is it any wonder that so many are flocking to gold and silver? Who doesn't like sure things?

For what it is worth, I still lean deflationary. I think we're in the eye of the hurricane. Time will tell.

Source Data:
St. Louis Fed: CPI-U
St. Louis Fed: PPI: All Commodities


Mr Slippery said...

What a chart! OK, I'll go Rorschach on you and tell you what I see.

There is a bearded man in the chart and he is turning the crank on some kind of machine. The machine is creating 1s and 0s. The 1s and 0s are flowing into foreign markets, but eventually find their way home. In the chart, I am observing myself observing myself observe the man as in a hall of mirrors. I have no idea what that means.

The inflation/deflation issue will be decided by the man with the machine. Unless someone stops him.

Anonymous said...

Bearded idol is powerful bad medicine. Builds false temple of ZIRP promise. When temple ceiling collapses on Mr. Roger's neighborhood, much sorrow. Do not worship bearded idol.

Stagflationary Mark said...

Is this a bearded American idol?

He's pitchy! The notes are all over the map! ;)

Anonymous said...

Is this a bearded American idol?<<

All I know is we could use a man like Crazy Horse right now!!

Stagflationary Mark said...


Would you settle for Bad Horse from Doctor Horrible's Sing Along Blog? He's the Thoroughbred of Sin!

Anonymous said...

Thanks, but we accept no imitations when it comes to dealing with the Federally Reserve :).

Stagflationary Mark said...


You are going to stick with the banker? Is that your final answer?

Greyhound Dog Racing glossary

Banker (Also, Key) - Highly expected to win. The strongest in a multiple selection in a parlay or accumulator. In permutation bets the banker is a selection that must win to guarantee any returns.

You win! Hurray! ;)

Anonymous said...

No--wanna stick it to the banker :).

Jazzbumpa said...

Beautiful chart!

It is the Worm Ouroboros.


Stagflationary Mark said...

It's a worm eating its own tail? Hahaha!


The Ouroboros often represents self-reflexivity or cyclicality, especially in the sense of something constantly re-creating itself, the eternal return...

Eternal returns would be nice, but I'd settle for the absence of a complete and utter financial collapse (within my lifetime). ;)

Anonymous said...

Commodity price increases do not equal inflation. Commodities can go up in price, due to increased demand for example, without any corresponding inflation, per se.

Inflation is a monetary phenomena. I suppose if you have inflation, you will have commodity price increases, ceteris paribus (sp?)

So maybe your causation is backwards, eh?

Stagflationary Mark said...


"Commodity price increases do not equal inflation."

I did not say or infer that they do.

"Inflation is a monetary phenomena."

I use the definition of inflation that affects my purchasing power. Just looking at the monetary supply tells me nothing about that. I must also look at the supply of stuff (be it commodities, houses for sale, and so on).

"I suppose if you have inflation, you will have commodity price increases, ceteris paribus (sp?)"

We had monetary inflation from 1980 to 2000 and commodity prices fell over the period (thanks in part to a modern mining miracle).

The Quantity Theory of Aluminum