A feature of the latter part of 2014 has been the decline in both oil and commodity prices which has seen the world economy impacted by disinflationary winds of change. For example the Commodity Research Bureau Index peaked at 505 in early May and is now at 452 for a decline of 10.5%. A recent driving factor in this has been the 9% fall in the metals sub-index since the beginning of August and as we have discussed before on here the main player has been this below. From the Financial Review.
Iron ore out of the port of Qingdao in China slumped 4.4 per cent to $US71.80 a tonne, taking its total decline for the year to more than 46 per cent as oversupply and ongoing concerns over China’s economy continue to put pressure on the commodity.
This poses all sorts of distributional questions on its own especially for the South China Territories (Australia). That is reinforced by the fact that the HSBC Purchasing Managers Index for China came in at 50 or unchanged this morning. This reinforces the theme of a slowing Chinese economy.
The price of oil
This has been on a weaker path since the 19th of June when the Brent Crude Oil benchmark reached US $115.71 per barrel. Whereas this morning we find that it has gone as low as US $77.91 per barrel for a drop of 33%. This has been quite a sea change as past surges were replaced by a period where a Star Trek style tractor beam held the price around US $108 and now we have seen quite a fall. Obviously the theories surrounding Peak Oil have taken quite a pounding from this although one day no doubt they will be back.
There is an OPEC meeting on the 27th of this month but so far it has been rather supine in the face of these falls.
The media and modern conventional analysis hate this
I am going to look at some new thoughts from the Cleveland Federal Reserve on the economic impact but the quote below highlights the current official theme.
there is some concern that low oil prices, which have continued to remain below $90 a barrel through October, will keep inflation persistently below or even push it further from targeted levels.
You may note that rather than welcoming lower oil prices they have “concern” that inflation will go further below its target. They could not be clearer that their interests diverge from ours. I would make them and their media lackeys go to the nearest petrol/gas outlet and pay more! After all it is a good idea isn’t it?
However lower prices can be combined with good news as well as being good news themselves as today’s UK retail sales release has shown.
Average store prices fell by 1.5% in October 2014 compared with October 2013, this was the largest fall since December 2002 when prices also fell by 1.5%.
Continuing a sustained period of year-on-year growth, in October 2014, the quantity bought in the retail industry increased by 4.3% compared with October 2013,
Falling prices leading to higher volumes as disinflation is combined with a type of reflation?! Yes and you have my permission to put a clown’s hat on anyone who calls this deflation today. Or perhaps they should Bart Simpson style have to be writing “I must not call disinflation deflation” on the blackboard,say one thousand times.
What does the Cleveland Federal Reserve tell us?
The most direct impact that low oil prices, both domestic and international, have on other domestic prices is through a decline in retail gasoline prices. While oil prices and gasoline prices follow the same trend, gasoline prices react with a delay to changes in oil prices. Gasoline prices have been trending around $3.50 a gallon for a few years, a level much higher than before the recession, but by the end of October, they had declined to $3.14 a gallon.
The Energy Information Agency now has US gasoline prices at US $2.98 per gallon. Also the drop has been larger than the Cleveland Fed would have you think as the price of gas averaged US $3.77 in June. Read that and weep UK readers as we pay some 2.43 times more if this week’s official figures are accurate. Perhaps the Cleveland Fed should buy its petrol/gas over here?
As an aside the US always mentions gasoline prices, is the diesel market very small?
What is the impact of this?
The authors of the Cleveland Fed paper seem desperate to avoid any favourable impacts from a falling oil price but even they tell us this.
The year-over-year percent change in the PPI for finished goods has been loosely related to international oil prices for the past 20 years. But when oil reached $60 a barrel in 2007, the two price series began to move more in sync. The year-over-year percent change in the PPI was lower in the most recent data release,
Ah so the effect has got stronger! Also the effect will be felt in other inflation indices.
Since the CPI is most directly influenced by oil price changes through its energy component, one question that remains is whether or not other components in the CPI are influenced by low oil prices…….A quick look at the year-over-year percent changes in the energy CPI and the CPI excluding energy suggests changes in energy prices are often followed by similar changes in the rest of the CPI’s components.
In fact apart from central bankers and their lackeys all of us will welcome such developments but predictably this paper does not.
The recent decline in oil prices is of less concern to many CPI forecasters, because it may not affect the “core” price level. It would be a bit more concerning, however, if low oil prices also affected other domestic prices as well.
But Shaun you have told us this will give an economic boost?
You might think that the Cleveland Fed would highlight this is a report on the impact of a falling oil price would you not? Well I will leave readers to decide for themselves why such an important matter merits only part of one sentence.
However, as consumers use savings from lower energy prices for other goods and services,
So the hard-pressed consumer is able to spend more on other things as disinflation morphs into reflation (increased aggregate demand) one more time? Although the Cleveland Fed cheerily hopes that this impact will fade.
these prices are likely to rise in response, offsetting the initial disinflationary impact of lower oil prices.
Hooray! Hooray! Oh wait a minute……
Back on the 4th of this month I pointed out that there are a multitude of effects from falling oil and commodity prices. The net losers are places such as OPEC and Australia. The winners are the importing nations who not only get lower inflation but they get a host of reflationary impacts on their economies as import costs fall and demand is boosted. In other words they gain which is translated by the Cleveland Fed into “concern”.
It is very 1984 is it not where what we have previously been told is good for us is apparently now bad for us? Of course Pink Floyd did discuss this issue on the aptly named Dark Side of the Moon.
Us and Them
And after all we’re only ordinary men
Me, and you
God only knows it’s not what we would choose to do
Forward he cried from the rear
and the front rank died
And the General sat, as the lines on the map
moved from side to side
Black and Blue
And who knows which is which and who is who
Up and Down
And in the end it’s only round and round and round
What is the first casualty of an (economic) war? It is the truth I am sorry to have to tell you. Also let me add one more awkward fact which is that countries such as Japan which are pursuing a currency war objective of a lower exchange rate (118 and counting versus the US Dollar) are eroding some of the benefits of lower commodity and oil prices