Relevant and even prescient commentary on news, politics and the economy.

Trichet and King: it’s energy, VAT, and food!

The global inflation picture is heating up. On Google, a search of ‘inflation’ spanning the month of February 2011 gets 311,000,000. For one year ago, the same search parameters yielded 1,850,000 hits. Inflation’s on the monetary policy makers’ minds. But why? In the developed world, it’s a food and energy story!

Seriously, look at German and US inflation since the 1960’s. Furthermore, check out core price pressures:

US 0.95% in January 2011…

…Germany 0.77% in January 2011

Dear Trichet, King, and part of the US FOMC: it’s energy and food….energy and food….energy and food…and VAT! David Beckworth writes a great piece about the merits of inflatin targeting.

Wheat, corn, soybean, and sugar prices have surged, whose price gains are now sitting very much on the back burner to oil prices. But look, wheat, soybean, and sugar price pressures are coming down. Therefore, food prices are showing signs of peaking. This should be taken into account when the ECB and BoE meet this week and next, especially if gas and fuel prices start to hinder economic growth prospects.

Some evidence:

* In the UK, price pressures are ever-present – the diffusion is much higher than in other European economies – but it’s very likely that prices peak. The economy’s been hit by a VAT hike twice in the last two years, and the depreciation of the nominal exchange rate continues to pass through to prices. Fiscal austerity will drag aggregate demand and prices – just hold on.
* In Germany, the domestic measure of consumer prices is expected to mark a 2.05% annual pace in February (1.96% in January), but the core level is growing a just a 0.77% annual rate (in January, which the latest available data point). For now, and probably throughout the rest of the year until union contracts reset on an aggregate level, it’s really all food and energy there.
* And in the US, core inflation is rising, but that’s primarily based on the re-emergence of the micro-pressures that are owner’s equivalent rent AND food and energy. Core inflation is now rising again (see recent Calculated Risk article), however, in my view, there’s not enough leading evidence to suggest that inflation expectations have in any way become unmoored. Unit labor costs, for example, remain submerged below a sea of economic profits (more on that tomorrow – but you can see a previous post on the subject here).

Watch monetary policy closely. The oil inflation may simply be the straw that breaks the camel’s back for some, since food prices have been headed north for some time. Key central banks shouldn’t hike – UK and ECB are notable examples – but they may.

I, consequently, still ‘hope’ that the recent hawkish rhetoric coming out of the ECB is simply a reflection of the hole that is the appointee to run the ECB after Trichet leaves in October. More bluntly put: they’ll say anything to get the job. (See Eurointelligence’s case for Mario Draghi.)

Rebecca Wilder

Prices and Quantity for Whale Oil and Whale Bone

by Mike Kimel

Prices and Quantity for Whale Oil and Whale Bone
Cross posted at the Presimetrics blog.

The following graph shows the price and quantity of Sperm whale oil (which is actually more of a wax).

Figure 1

The positive correlation is a bit of a problem, and the fact that Quantity seems to lead Price by about ten years is a bit more of a problem.

Now, that could be just an interesting artifact, except for this graph, which shows the price and quantity of whale oil (and this time I do mean oil).

Figure 2

Notice that the correlation is negative (sigh of relief) but once again, you get some information about prices from quantities produced decades earlier.

Here’s whale bone. Its worse.

Figure 3.

So what’s going on?

This post comes from something I’m playing with at work (I’m trying to understand how a few specific commodities might play out over a very long period of time) and is posted with the permission of my boss. (Thanks Lauren!) I don’t usually like to play with data that goes that far back as it isn’t always reliable but I figured this was fine for broad strokes purposes.

Price and quantity data from A History of the American Whale Fishery by Walter Sheldon Tower, Tables IV and V. Data was entered by hand so hopefully I didn’t screw up too much too badly. CPI estimates from the Minnesota Fed.

If you want my spreadsheet let me know – I’m at mike period my last name (one m only) at

Was I Wrong? Is Oil Trading Primarily a Speculative Market

How else to explain a 20% drop in prices since The Destruction of the Gulf of Mexico?

Oil fell below $70 Monday, reaching a low of $69.27 before rebounding slightly…The turnaround has been sudden — oil hit an 18-month high of $87.15 a barrel during trading on May 3.

The plunge in oil extended to the New York Stock Exchange, where shares of major energy companies were lower.

Is oil the derivatives of hard commodities: the place where liquidity is based on speculation, not fundamentals?

Why I Don’t Do Market Timing

Starting in September, my income, such as it were, is basically in C$.

Stephen Gordon explains, with graphics, why that has been such a bad trade.

The scariest part:

The 2002-2008 expansion provided significant real income gains, and more than half of those gains were due to the improvement in Canada’s terms of trade.

So there really isn’t an infrastructure in place to benefit from autonomy.

Right now, Stephen Harper should be in consideration for the title of the Luckiest Man on Earth.