Is “Once In A Lifetime” the musical theme for falling oil and commodity prices?

The main feature of the world economy over the past six months or so has been the fall in oil and commodity prices. It was only yesterday that I was discussing one of the consequences of this which was a much lower annual rate of consumer inflation in the UK albeit one which saw a 1.2% differential between our old and new inflation targets. This morning has seen a further reinforcement of the disinflationary theme of these times from Italy.

In December 2014, the Italian consumer price index for the whole nation (NIC) held steady on both monthly and annual basis (the annual rate of change observed in November 2014 was +0.2%).

In some ways if looked at in isolation this looks like a part of an economic nirvana where all changes are relative price changes. But of course Italy has been suffering in terms of its overall economic performance meaning that for once the word deflation is a genuine issue. If we look at the cause of the inflation stability readers will not be surprised to read the major player is as shown below.

The dynamics on annual basis of the All items index was mainly due to the widening of the annual decrease of prices of Non-regulated energy products (-8.0%, from -3.1% in November 2014) which was determined by the further marked decline of prices of fuels.

Before I move on it was interesting to spot that Italy like the UK has falling prices for goods but inflation for services. Also the inflation index quoted above is not the Euro standard called HICP but we get more detail for the one I have used and it highlights how confusing and inconsistent some of the nomenclature is. Sorry.

Oh and if you want a genuine example of clear falling prices and outright disinflation then let us visit the  country of a regular reader and commenter on this blog.

Bulgaria National Statistics Institute: The annual inflation in December 2014 compared to December 2013 was -2.0%

What does this mean overall?

There are two sides to the lower oil and commodity price argument. The first is the one which I have put forward on many occasions. Because lower prices for what are raw resources and essential items leave consumers and producers with more money to spend on other goods and services then the change is overall reflationary and an economic boost as time passes. There is of course also a switch from producers such as OPEC and Australia to consumers.

However there is a ying to the above yang and this is illustrated by this lyric from Talking Heads.

And you may ask yourself
Well…How did I get here?

This issue moves us from the beneficial supply effect discussed above to fears about demand and specifically that weaker demand may have been a factor in causing the oil and commodity price falls. That for obvious reasons is far less optimistic as whilst we may see higher future economic growth we are starting from a weaker base than we previously thought. The World Bank has highlighted this line of thought this morning with its grandly named Global Economic Prospects report.

The global economy is still struggling to gain momentum as many high-income countries continue to grapple with the legacies of the global financial crisis and emerging economies are less dynamic than in the past.

Risks to the global outlook remain tilted downwards. Weak global trade growth is anticipated to persist during the forecast period, potentially for longer than currently expected should the Euro Area or Japan experience a prolonged period of stagnation or deflation.

If we examine the situation we see that the World Bank has an unanticipated effort at comedy as it trims its world growth forecast by 0.2%! I think we can safely file that one under spurious accuracy. Also it has a fairly consistent track record of being wrong in the credit crunch era so that makes this morning’s events somewhat surprising. Although it never seems to sing along to this part of Once In A Lifetime.

And you may say to yourself
My God!…What have I done?!

What has happened today?

The simple answer is that disinflationary pressure has built up again at the beginning of the price chain. From the Financial Times.

London-traded benchmark zinc prices have hit a nine-month low of $2,007 per tonne. The lead price is at its lowest in almost 30 months at $1,754 a tonne, according to data compiled by Reuters.

Copper spiralled almost 8 per cent lower earlier in the session to below $5,400 per tonne as traders slashed their holdings to limit losses.

If we continue with a metallic flavour then there is the issue of what has happened to the Iron Ore price to consider as well. From Engineering News.

Benchmark 625 grade iron ore for immediate delivery to China dropped 0.95 to $67.90 a tonne on Tuesday, according to data compiled by The Steel Index.

Iron Ore nearly halved last year amid a supply glut, touching a low of $65.60 on December 23, its weakest since June 2009.

So we see that other metals prices are catching up with Iron Ore which has led the price drops so far. I had been wondering why Dr. Copper had not moved more and now we see quite a catch-up in one day! For those used to another measurement of its price where US $3 is used as a benchmark it is now US $2.50 or 26% lower than a year ago.. Also regular readers will recall that in China copper was financialised as we wonder what the price falls will do to the organisations who were using it as collateral? Margin alert?

Oil

The price of oil is more stable today with a barrel of Brent Crude Oil trading at just above US $46. But its fall which has been something of a plummet means that the price has fallen by 56% over the past year and by 34% since the beginning of December.

Comment

The overall picture here can be summed up by the Bloomberg Commodity Index which peaked at 175 in the spring of 2011 and then drifted lower to 138.4 in April of last year but has dipped below 100 at one point today. If we look at this in glass half-empty terms then there is an issue of how did this happen? There are implications for how healthy demand was for these materials and resources. However I also note that over 2014 banks and financial organisations have been withdrawing from these markets and it is my opinion that they have been a factor in higher commodity prices. Is there no end to the way that the bankocracy works against us? So the picture here is foggy as we wait for more evidence. For countries which are commodity producers there are clear falls in measured output as we think of Australia,Canada, Russia and OPEC in particular.

The other side of the coin is that lower oil and commodity prices will act as a stimulus as 2015 develops and progresses. Let us hope that it operates quickly and strongly.

A clear and present danger if I may evoke memories of a film title is the way that types of oil and commodity production were financed. This is of course the way that we got into the credit crunch as we discovered that the word safe also covered risky,dodgy and indeed sub-prime. Returning to my song for the day we will find out if it was once in a lifetime or one of many.

Letting the days go by
Let the water hold me down
Letting the days go by
Water flowing underground
Into the blue again
After the money’s gone
Once in a lifetime
Water flowing underground

The UK Pound

Meanwhile it has nudged above 1.29 this morning versus the Euro. Happy Days for skiers.

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16 thoughts on “Is “Once In A Lifetime” the musical theme for falling oil and commodity prices?

  1. Hello Shaun ,

    first thoughts – so now that the “core” prices are rising and that non “core” is falling – are we to expect food and fuel to come in from the cold and now get included?

    only because Creative Price Index seems to be made up of anything stable or falling in price 🙂

    I have to laff at the twist and turns our ONS go through for HMG to get a lowest figure possible – I’d say they have bankrupted any credibility they may ever had had ( except for MiniTru – they’ll always beat the drum for TPTB )

    Forbin

    PS: Services increasing ? better drop Coke and Hookers quick!

    • Hi Forbin

      The “core” inflation concept was always somewhat dubious to me as I have blogged many times in the past. Yes fuel and food prices can be volatile but they are both vital items. Or rather vital items for everyone but central bankers who apparently do not need to eat etc..Also they blow the delayed consumption if we have lower prices out of the water because I do not wait to eat today’s dinner tomorrow even if it is cheaper!

      It will be interesting to see if the “core” concept is used as often when it is higher than the headline as vice versa….

  2. Hello Shaun,

    As the news seems full of Euro QE ( should German courts agree) then perhaps this asset drop of oil and metals , etc , will be short lived as Supa Mario spends umpteen Billion Euros ……. to achieve a Japanese result ?

    Fantastic , so long as he doesn’t go into popcorn futures !

    Forbin

  3. Hi Shaun,

    Looks like the ECB might be riding the Italy’s and the Euro’s rescue with a QE program in the very near future! The Advocate-general has given an opinion that QE is compatible with EU law and does not constitute economic policy! So it looks like the legal arguments against ECB QE are being ‘resolved’ and this might explain the increase in GBP against the Euro.

    You might need to register on the website to see the full story:

    http://www.europeanvoice.com/article/court-backs-ecbs-right-to-quantitative-easing/?utm_source=email&utm_medium=alert&utm_campaign=Court+backs+ECB%27s+right+to+quantitative+easing

      • Ultimately, Merkel and therefore Germany will tow-the-line, where Merkel only does ‘send the voters too sleep’ consensus politics, not confrontational politics, where she likes the quiet life.

    • Hi Rods and thanks for the link.

      The current situation is really perverting markets right now. For example there is a decent chance that Italy will have to have a haircut/default on its bonds in the next 5 years and yet its five year bond yield closed tonight at 0.88%. Less than the UK! So much for free markets…

    • Hi Dutch

      Yes especially in Western Australia which has ridden the boom. I note that as the day starts down under the Sydney Morning Herald is not optimistic.

      “Copper’s plunge also dragged the Australian dollar lower by almost US1¢ to US80.87¢, reflecting the economy’s vulnerability to a downturn in commodity prices even though iron ore, energy and coal are more important to Australia’s export profile. The copper price has a dual role as an indicator of global activity for some experts.

      The latest rout in commodities will force the Abbott government to consider further savings measures in the next federal budget.
      Assistant Treasurer Josh Frydenberg said deeper fiscal cuts could not be ruled out in light of the hit to national income. “Australia focuses its exports on resources … [we’ve seen a] fall in the iron ore price by around 50 per cent from the beginning of last year, we’ve seen the oil price fall by a similar figure, we’ve also seen downward pressure on coal and wheat,” Mr Frydenberg said.
      “The numbers will be reviewed when it comes round to the next budget in May but there’s no doubt this is putting pressure on government revenues.

      Read more: http://www.smh.com.au/business/markets-live/markets-live-miners-cop-more-pain-20150115-3o58f.html#ixzz3Oq1I9GfK

      Oh and

      “Australia has the world’s most overvalued housing market on a price-to-income basis after Belgium, according to the International Monetary Fund.”

      Read more: http://www.smh.com.au/business/landlords-swallow-losses-to-bet-on-price-gains-20150109-12kx49.html#ixzz3Oq232mj2

      What could go wrong?

  4. Great column, Shaun, as usual.
    Bank of Canada Deputy Governor Timothy Lane gave a speech yesterday in Wisconsin called “Drilling Down_Understanding Oil Prices and Their Economic Impact”:

    http://www.bankofcanada.ca/wp-content/uploads/2015/01/remarks-130115.pdf

    In his speech, he seems to ignore the possibility of a housing bust in oil patch cities as a result of the plunge in oil prices. In fact, it is already in evidence in the most important of them, Calgary. The Teranet National Bank House Price Index showed monthly changes for Calgary of -0.2% in November and -1.1% in December. Maybe the oil patch will not see the soft landing that the Bank has been predicting for the Canadian housing sector.
    The speech also conspicuously ignored the Bank’s operational guide, the core CPI, which excludes motor gasoline and fuel oil, and so is less influenced by the fall in oil prices. This leads me to believe that the Bank of Canada intends to replace its core CPI as a measure of underlying inflation with some other gauge, likely their common component of the CPI measure with the 2016 renewal of the inflation-control agreement. Mark Carney made absolutely no changes of any kind in the inflation-targeting regime when he signed off on the 2011 renewal agreement, but for 2016 it seems that Governor Poloz wants to provide at least the illusion that the Bank has carefully examined all parts of its inflation targeting mechanism.

      • Shaun, the depth of your reading never fails to amaze me as it is a specialist paper even for Canadian economists. I am very familiar with the paper by M. Sabourin, as he presented it at StatCan when I was still working there. He was also, by the way, the co-author of a 2009 paper with my friend Richard Dion, then a Bank of Canada employee, on the treatment of owner-occupied housing in the CPI. It included an estimate of what a CPIH(NA) series would look like for Canada. The BoC decided. in its wisdom (?), not to publish it.
        There probably is a good chance the BoC will raise its target inflation rate with the 2016 renewal agreement. The recent speech by Deputy Governor Agathe Côté, “Inflation Targeting in the Post-Crisis Era”, shows that they are seriously considering this:
        http://www.bankofcanada.ca/wp-content/uploads/2014/11/remarks-181114.pdf
        It is also notable that Deputy Governor Côté relegated one of the best arguments for reducing the target rate to a footnote: “We also need to consider the possibility of reduced measurement bias in the CPI, given improvements made by Statistics Canada in the past few years. A lower bias would lead to a higher true rate of inflation for a given inflation target, thus mitigating the need for a higher target.” Effectively, Deputy Governor Côté is announcing that the BoC is condoning stealth increases in the effective target rate of inflation that arise due to reductions in the measurement bias of the Canadian CPI, and has no intention of adjusting the target inflation rate downwards so that a 2% target rate means the same thing In 2016 that it did in 1995. It should also be noted that these reductions in measurement bias have not come to an end. In February the CPI will move to a new basket, and the timeliness of its basket updates will improve from 14 months at the time Deputy Governor Côté spoke to 13 months. The timeliness of basket updates was 25 months in 1995. The frequency of basket updates is also supposed to be increased from biennial to annual at some undeclared date in the future. It was every four to six years in 1995. Of course, both an increase in the timeliness and in the frequency of basket updates tends to reduce the upward measurement bias in the CPI inflation rate.

  5. Shaun I continue to find it quite staggering how the so called market professional were so far out on calling the oil market collapse. There must be stash of hedges that are well below the water line that will burn some bankster institution somewhere causing another lurch downwards.
    Furthermore consumers may have a few quid more in there pockets every week but most will only fund more Chinese imports so will it help revive our own productive economy? The most pragmatic step would have been to slap a 10p/litre fuel tax to pay a bit of the deficit off!!

    • Hi Nickrl and welcome to my corner of the blogosphere

      Actually the credit crunch era is littered with what one might call “expert” errors. After all didn’t RBS stuff its clients with interest-rate hedges just as they were slashed? The last few days have seen investment banks slash their forecasts for oil,iron ore and copper heavily. At the top were they projecting them to infinity and beyond like Buzz Lightyear mimic?

      We discussed on here a month or so ago the possibility of a return of the UK fuel price escalator but a return post election!

  6. Shaun
    Clearly you are right that the banksters are partly to blame for commodity price falls but I suspect their effect is greaterthan you think.
    I notice that you did not mention gold, it rose after this mornings bad news do you see it rising?
    Your post reminded me of a golden oldie by Martha Reeves and the Vandellas.

    Nowhere to run baby, nowhere tohide
    I know your no good for me
    But free of you I’ll never be no

    JRH

    • Hi JRH and welcome to my corner of the blogosphere

      A couple of years or so ago Martha and the Vandellas performed that song on the New Years Eve edition of the Later music show and very enjoyable it was too. As for gold I am not so sure after all other “safe havens” like the Swiss Franc seem to be already in demand don’t they?

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