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?
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.
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.