Industrial Production and Commodity Prices

Supply-siders try whenever possible to look at market-based indicators of what is happening in the real world, rather than indicators that come from government statistics offices. Government statistics can be misleading - they can lag reality by months, they can be revised after the fact, and they can be subject to distortions and incorrect adjustments. Market-based indicators, however, are real-time, and they reflect the combined actions and wisdom of hundreds of millions of people all over the world. If I want to know what is happening today, on the margin, I would always prefer to look to market prices rather than government statistics.

So these two charts are quite different, in that the top chart comes from government offices whereas the bottom chart comes from the market. But, as I think should be evident, they tell approximately the same story. The top chart shows the path of industrial production in most of the industrialized world, while the bottom chart shows an index of spot industrial commodities. The message: stronger production tends to correlate with higher prices and vice versa. Both prices and production are rising on the margin, so this reflects a positive picture of growth around the world.

The differences in these charts are also instructive. Note that industrial production has fallen so severely, despite this year's rebound, that it has effectively wiped out most or all of the gains of the past 10 years. Yet commodity prices have almost doubled over the past 10 years. I take this to be a sign that accommodative monetary policy has been an important source of commodity price gains, and that is a portent of price inflation that could find its way into prices throughout the global economy in coming years.

The other message of these charts is that all central banks are probably guilty of pursuing overly-accommodative monetary policies. All currencies have lost significant value relative to gold and commodity prices in recent years. Rising commodity prices are telling us that the global economy is rebounding and that inflationary pressures are percolating. It's past time that central banks started taking their feet off the monetary accelerator, particularly the Fed, since the dollar has fallen much more than other currencies.

Comments

[conceptwizard]

Thus we have financial profit inflation with price deflation in a shrinking economy. What we will have going forward is not Weimar Republic type price hyperinflation, but a financial profit inflation in which zombie financial institutions turning nominally profitable in a collapsing economy

2009 Nov 17 08:21 PM

[Donald Ingram]

What industrial production? It has been decimated. To find the corresponding number of workers now in the industrial sector you have to go back in the records to 1940!!! And this sector is still shrinking!!! Depression numbers are coming.

2009 Nov 18 01:20 AM