Will commodity price rises trigger inflation in 2018?

As we begin our journey into 2018 then there has been one clear trend so far as Bloomberg has pointed out this morning.

The Bloomberg Commodities Spot Index, tracking the price of 22 raw materials, jumped to its highest since December 2014 on Thursday. The gauge has risen for a record 14 days in a row.

If we take a look at the underlying data we see that the index has rallied from just below 340 on the 11th of December to 361 as I type this and it has been pretty much one-way traffic. So perhaps ripe for a correction in the short-term but if we look further back we see that it is up 8% on a year ago and that this stronger phase began just under 2 years ago in mid January 2016 when the index dipped below 255. This leaves us with an intriguing conclusion which is that the commodities index saw a strong rally in 2016 just as we were being told inflation was dead as mainstream analysis looked back on the previous downwards trend.

Bloomberg is upbeat on the causes of this recent phase.

The strongest manufacturing activity since the aftermath of the global financial crisis is slowly draining commodities surpluses, sending prices to a 3-year high as investors pour money into everything from oil to copper.

“Rarely has the outlook for a New Year been as encouraging as it is today,” said Holger Schmieding, chief economist at Berenberg Bank in London.

With factories around the world humming, demand for raw materials is fast increasing.

That is an upbeat way of looking at the issue although of course it omits something that in other articles they tell us is important which is the use of finite resources. We get however a clue to their emphasis from this.

Where to make Big Money in Commodities, Energy

I particularly like the way that Big Money is in capitals. Anyway well done to those who had stockpiled commodities. Also there may be a misprint about the chief economist of Berenberg Bank being in London as of course Bloomberg readers will have been told that all such jobs have gone to Frankfurt although they may be further confused by the brand new shiny Bloomberg offices in London! Moving to the Financial Times we also see that good economic news is on their minds.

Markit’s global survey of manufacturing activity rose to a near seven-year high in December, fuelling optimism that 2018 could be another year of strong growth.

Crude Oil

The rally here poses something of a problem for economics/finance themes because as regular readers will recall we were told that the advent of shale oil production would prevent price rises. One part of the analysis was true in that they have indeed produced more oil.

The U.S. Energy Information Administration (EIA) expects U.S. crude oil production to have averaged 9.2 million bpd for all of last year. It expects U.S. crude oil production to average an all-time high of 10.0 million bpd this year, which would beat the current record set in 1970. ( OilPrice.com)

That is of course more than awkward for those who put Peak Oil theories forwards in the 1970s for a start. Moving back to the current oil price what was not forseen was that OPEC will not only announce production cuts but actually go through with the announcements leading to this.

however, oil prices rose steadily in the fourth quarter of 2017 to end the year at above $60 per barrel WTI and $66 per barrel Brent.

Brent Crude Oil nudged over US $68 per barrel earlier today or as high as it has been for two and a half years. At such a level we see that there is good news for oil producers of all sorts.Firstly there must be something of a bonanza for the shale oil producers with the cash flow style business model we have previously analysed. But also there will be all sorts of gains for the more traditional oil producers in the Middle East as well as Canada and Russia. There has been an irony in that the pipeline shutdown for the UK Forties field meant that Brent production could not benefit from higher Brent prices but that is now over.


Last September an International Monetary Fund ( IMF) working paper looked at how oil price moves affected inflation.

 We find that a 10 percent increase in global oil inflation increases, on average, domestic inflation by about 0.4 percentage point on impact, with the effect vanishing after two years and being similar between advanced and developing economies.

There was also some support for those who think that the effect is stronger when prices rise.

We also find that the effect is asymmetric, with positive oil price shocks having a larger effect than negative ones

The results also vary from country to country as the impact on the UK is double that of the impact on the United States although this may be influenced by 1970s data when the UK Pound £ would have acted like the Great British Peso on any oil price rise.

As an aside I would like to remind everyone of the way a surge in the oil price contributed to the economic effects of the credit crunch, something which tends to get forgotten these days. On that road the credit crunch era becomes easier to understand and the establishment mantra which this IMF paper repeats becomes more questionable.

The has declined over time, mostly
due to the improvement in the conduct of monetary policy.

A darker road can be found if we look at the impact of bank commodity trading desks back then because if as I believe they drove oil prices higher there is a raft of questions to add to the other scandals we have seen such as Li(e)bor and foreign exchange rigging.


There has been a raft of news about these hitting new highs and let us start with what Dr,Copper is telling us.

Copper gained 30%  in 2017 as it continues to recover from six-year lows struck early last year……… Measured from its multi-year lows struck at the beginning of 2016, copper has gained more than 70% in value. ( Mining.com)

Palladium has been hitting all-time highs this week. If we look deeper we see that metals prices have been rising overall as the CRB metals index which was conveniently at 800 this time last year is at 912 as I type this.


There are various factors to consider here but let me open with a word not in frequent use in the credit crunch era which is reflation. We are seeing a stronger economic phase ( good although there is the underlying finite resources issue) but how much of this higher demand will feed into inflation may be the next question? There have been signs of Something Going On as Todd Terry would put it. From the Composite PMI or business survey for the Euro area.

The pace of inflation signalled for each price
measure remained strong relative to their long-run
trends, however, and among the steepest seen over
the past six-and-a-half years.

Also for the UK services sector.

Input price inflation reached its highest level since
last September, with service providers noting
upward pressures on costs from a wide range of

Moving to a different perspective some seem to be placing their betting chips in the US according to the Financial Times.

Investors pour money into funds that protect against inflation

Also there will be wealth and GDP shifts in favour of commodity producers and from those that consume them. The obvious beneficiary is much of the Middle East but others such as Australia, Canada and Russia will be smiling and that is before we get to the US shale oil producers who have been handed a lifeline. It also reminds me that the Chinese effort to get control of commodities around the world and particularly in Africa looks much more far-sighted than us western capitalist imperialists have so far managed. That is something which will particularly annoy Japan which of course is a large loser as commodity prices rise due to its lack of natural resources as its own more violent and aggressive efforts in this field badly misfired in the 1940s.


2017 is seeing the return of the inflation monster

As we nearly reach the third month of 2017 we find ourselves observing a situation where an old friend is back although of course it is more accurate to describe it as an enemy. This is the return of consumer inflation which was dormant for a couple of years as it was pushed lower by falls particularly in the price of crude oil but also by other commodity prices. That windfall for western economies boosted real wages and led to gains in retail sales in the UK, Spain and Ireland in particular. Of course it was a bad period yet again for mainstream economists who listened to the chattering in the  Ivory Towers about “deflation” as they sung along to “the end of the world as we know it” by REM. Thus we found all sorts of downward spirals described for economies which ignored the fact that the oil price would eventually find a bottom and also the fact that it ignored the evidence from Japan which has seen 0% inflation for quite some time.

A quite different song was playing on here as I pointed out that in many places inflation had remained in the service-sector. Not many countries are as inflation prone as my own the UK but it rarely saw service-sector inflation dip below 2% but the Euro area for example had it at 1.2% a year ago in February 2016 when the headline was -0.2%, Looking into the detail there was confirmation of the energy price effect as it pulled the index down by 0.8%. Once the oil price stopped falling the whole picture changed and let us take a moment to mull how negative interest-rates and QE ( Quantitative Easing) bond buying influenced that? They simply did not. Now we were expecting the rise to come but quite what the ordinary person must think after all the deflation paranoia from the “deflation nutters” I do not know.


January saw quite a rise in consumer inflation in Spain if we look at the annual number and according to this morning’s release it carried on this month. Via Google Translate.

The leading indicator of the CPI puts its annual variation at 3.0% In February, the same as in January
The annual rate of the leading indicator of the HICP is 3.0%.

Just for clarity it is the HICP version which is the European standard which is called CPI in the UK. It can be like alphabetti spaghetti at times as the same letters get rearranged. We do not get a lot of detail but we have been told that the impact of the rise in electricity prices faded which means something else took its place in the annual rate. Also we got some hints as to what is coming over the horizon from last week’s producer price data.

The annual rate of the General Industrial Price Index (IPRI) for the month of January is 7.5%, more than four and a half points higher than in December and the highest since July 2011.

It would appear that the rises in energy prices affected businesses as much as they did domestic consumers.

Energy, whose annual variation stands at 26.6%, more than 18 points above that of December and the highest since July 2008. In this evolution, Prices of Production, transportation and distribution of electrical energy and Oil Refining,
Compared to the declines recorded in January 2016.

In fact the rise seen is mostly a result of rising commodity prices as we see below.

Behavior is a consequence of the rise in prices of Product Manufacturing Basic iron and steel and ferroalloys and the production of basic chemicals, Nitrogen compounds, fertilizers, plastics and synthetic rubber in primary forms.

The Euro will have had a small impact too as it is a little over 3% lower versus the US Dollar than it was a year ago.


The land of beer and chocolate has also been seeing something of an inflationary episode.

Belgium’s inflation rate based on the European harmonised index of consumer prices was running at 3.1% in January compared to 2.2% in December.

The drivers were mostly rather familiar.

The sub-indices with the largest upward effect on inflation were domestic heating oil, motor fuels, electricity, telecommunication and tobacco.

These two are the inflation outliers at this stage but the chart below shows a more general trend in the major economies of the Euro area.

The United States

In the middle of this month the US Bureau of Labor Statistics confirmed the trend.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index rose 2.5 percent before seasonal adjustment.

This poses some questions of its own in the way that it confirmed that the strong US Dollar had not in fact protected the US economy from inflation all that much. The detail was as you might expect.

The January increase was the largest seasonally adjusted all items increase since February 2013. A sharp rise in the gasoline index accounted for nearly half the increase,


A currency plummet of the sort seen by the Egyptian Pound has led to this being reported by Arab News.

Inflation reached almost 30 percent in January, up 5 percent over the previous month, driven by the floatation of the Egyptian pound and slashing of fuel subsidies enacted by President Abdel-Fattah El-Sisi in November.

Ouch although of course central bankers will say “move along now……nothing to see here” after observing that the major drivers are what they call non-core.

Food and drinks have seen some of the largest increases, costing nearly 40 percent more since the floatation, figures from the statistics agency show. Some meat prices have leaped nearly 50 percent.


There is much to consider here and inflation is indeed back in the style of Arnold Schwarzenegger. However some care is needed as it will be driven at first by the oil price and the annual effect of that will fade as 2017 progresses. What I mean by that is that if we look back to 2016 the price of Brent Crude oil fell below US $30 per barrel in mid-January and then rose so if the oil price remains around here then its inflationary impact will fade.

However even a burst of moderate inflation will pose problems as we look at real wages and real returns for savers. If we look at the Euro area with its -0.4% official ECB deposit rate and wide range of negative bond yields there is an obvious crunch coming. It poses a particular problem for those rushing to buy the German 2 year bond as with a yield of 0.94% then they are facing a real loss of around 5/6% if it is held to maturity. You must be pretty desperate and/or afraid to do that don’t you think?

Meanwhile so far Japan seems immune to this, of course there will eventually be an impact but it is a reminder of how different it really is from us.

UK National Statistician John Pullinger

Thank you to John and to the Royal Statistical Society for his speech on Friday on the planned changes to UK inflation measurement next month. Sadly it looks as if he intends to continue with the use of alternative facts in inflation measurement by the use of rents to measure owner-occupied housing costs. These rents have to be imputed because they do not actually  exist as opposed to house prices and mortgage costs which not only exist in the real world but are also widely understood.

Russia faces the economic consequences of a plummeting oil price

One of the themes of this blog over the past year or so has been that the fall in the price of crude oil and other commodities is good overall for the world economy. Mostly the argument revolves around the fact that there are a lot more oil consumers than producers as we note that lower consumer inflation has pushed real wages higher in net consuming countries. However this begs a question for producers and squarely in that camp we find Vladimir Putin’s Russia which will note this morning’s news with dismay. From Marketwatch.

February Brent crude LCOH6, -1.59%  on London’s ICE Futures exchange fell 80 cents, or 2.7%, to $28.14 a barrel, but overnight fell to as low as $27.67 a barrel.

If we look back we see that it puts it some 43% lower than a year ago as the disinflationary burst for the world continues. However for reasons I shall explain below this is an example of deflation for Russia which comes combined with inflation in what is an example of how quite a lot can go wrong at once.

As an aside regular readers may recall when Brent Crude Oil pushed above WTI or West Texas Intermediate by over US $20 at one point and the justifications which followed. I wonder where they have gone as I see that Brent Crude is now lower by around 70 cents. Was this another sign of financialisation of commodity markets?

Also this reminds me to point out that Russian crude has a benchmark called Urals Crude which is trading some US $3 below the Brent benchmark so that Russia is only getting around US $25 right now. Back in the commodity boom days it too traded over giving Russia not that long ago an extra US $100 per barrel in the boom times.

The cost of the oil price fall to Russia

Back on the 23rd of November last year I looked at oil production.

Output from January to October averaged about 10.7 million barrels a day, a 1.3 percent increase over the same period in 2014, the data show. That’s in line with the Russian Energy Ministry’s full-year forecast for production of 533 million tons, or 10.7 million barrels a day.

Back then we thought that Russia had trouble with an oil price of US $44 per barrel,little did we know what would happen next! Back then I calculated that Russia was around US $680 million per day worse off compared to the past “tractor beam” price of US $108 well now it is more like US $890 million per day. A back of the envelope style calculation but you get the idea.

The Bank of Russia did its own calculation in its December Monetary Report.

In January-September 2015, the decline in prices for oil, oil products, gas, coal, iron ore and nickel led to a reduction in export earnings in these categories of commodities compared with the same period of the previous year by more than 110 billion US dollars,

The plunging Ruble

The currency markets responded to this change in Russian fortunes by marking the Russian Ruble sharply lower and this has carried on. Back on November 23rd I pointed out that the low 30s had been replaced by 66 which was quite a drop. Well the drumbeat has continued since as a lower oil price as Russia Today informs us.

The euro rose more than one ruble on the Moscow exchange, exceeding 85 rubles for first time since December 2014. The dollar reached nearly 79 rubles.

Thus we see that Russians will find everything from abroad to be more expensive and in fact much more expensive. This will impact on matters such as the Central London housing market and the concept of Chelski as I note that it takes 112 Rubles to buy a single UK Pound £.

Imported Inflation

A currency fall on this scale means that there will be imported inflation and this of course differentiates Russia from a world of zero or even negative inflation. From the Bank of Russia.

At the end of 2015, inflation will be roughly 13%. In 2016 Q1, inflation is estimated to be at 7.5–8.0%.

Since last summer 2014 when most of the rest of the world was seeing falling and then zeroish inflation prices in Russia have risen by 20 % or so. This is what has hit the ordinary Russian if we look at purely domestic terms and them going to the shops. The amount shoots higher whenever we look at foreign purchases or anything which is imported.

Economic growth

The falls in real wages of the order of 9 to 10% have had a clear impact on domestic consumption.

The annual rate of decline in household spending on final consumption was 8.7– 8.9% in Q3, according to estimates. In October, the contraction in consumer demand continued, as shown by the decline in retail trade turnover (to 11.7%).

These are Greece like numbers and we see something else familiar from that situation if we look at trade.

The weak ruble and low income of all economic agents meant that the high rate of decline in import quantities of goods and services persisted (roughly 30%).

This means that in a surprise to those who have not observed such a situation before we see this impact on economic growth and GDP (Gross Domestic Product).

As a result, the positive contribution of net exports to GDP growth increased. According to estimates, this trend in net export dynamics will remain in 2015 Q4.

This impact will be temporary and flatters the current situation as it will fade away over time as some import demand will remain and be inelastic. However in spite of this positive influence it was a grim 2015 and 2016 whilst better is none too bright either.

the estimated overall GDP growth for 2015 was revised upwards to the upper bound of the range defined by the Bank of Russia in the previous Monetary Policy Report, i.e. to -(3.7–3.9%). In 2016 Q1, the annual rate of GDP decline will continue to slow to -(1–2%).

Some care is needed with reporting these numbers as they are of course in Russian Rubles as we note the impact of this. What I mean is that these are bad enough but of course if we were to price things in US Dollars the situation is much worse. This is how people tweet and write about Russian GDP looking so bad in US Dollar terms as a falling GDP is combined with a plunging Ruble. Of course it is also true that Russian GDP will have taken a dive in most currencies but it is particularly bad against the US Dollar as we wonder if this is another front in the currency wars.

Asset prices

If we look at the central bankers favourite part of the economy we see trouble too. If we start with the stock market we see that it had a surprisingly stable 2015 but has fallen 9% in 2016 so far. As to house prices the Bank of Russia tells us this.

However, with subdued economic activity and, in particular, shrinking real disposable household income and falling investment demand, it is highly likely that monthly growth in housing prices will remain negative up to the end of 2015, and a decrease in prices will be recorded at the end of the year.


We do not know what will happen next to the oil price and care should be taken in using a marginal daily price to cover a country’s economic prospects. But there clearly has been a major shift lower in oil and commodity prices and that shift has hit the Russian economy very hard. From our point of view it is hard to imagine a place where imported good and services have doubled in price and some have done more than that. The economy itself will have the problems of money illusion too – as Ruble prices will adjust over time rather than immediately – which UK economic history shows does not help.

The forecasts stated above are based on a higher oil price than now so Russia faces the prospect of 2016 being another year of economic contraction. Also there are two other things which stand out in its economic situation. One is the problem of repaying debt in US Dollars with a depreciating Ruble. The other is having an interest-rate of 11% as much of the world has near zero and some of Russia’s neighbours have negative interest-rates. If we combine the two it must be awfully tempting to borrow in US Dollars, Euros and Yen mustn’t it?





The economy of South Africa must be in turmoil

This week has seen South Africa reach the headlines but it has not been about cricket or rugby. Instead the removal of its finance minister has led to a currency crisis being reported. However as we look deeper we see that the South Africa Rand has been “fallin”  in Alicia Keys terms for quite some time and is in fact a serial offender on this front. If we look back we see that five years ago just under 7 Rand purchased one US Dollar and this morning it takes some 15.5 of them. Over the past year the move has been accelerating as back then it took 11.6 Rand to buy a buck. In essence it has been singing along to Paul Simon for quite a while.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

This sort of situation is self-fulfilling as if you have funds available the sensible course is to park it abroad which only makes the currency fall further and encourages others to do the same in a repeating loop.

How well do financial markets work?

This is another view of the equilibriums of economic theory which invariably turn out to be something between a mirage and a chimera. Let us look at this from the point of view of an average house buyer in the UK who has according to official data some £286,000 to spend. Each of those UK Pounds will buy around 23 Rand at these levels. According to Knight Frank (h/t James Mackintosh) you could buy this in Cape Town.

This beautifully appointed well-loved family home offers great open plan living. With 3 reception areas consisting of formal lounge; open plan dining room leading to gourmet kitchen and family room; separate scullery;4 bedrooms (2 en-suite bathrooms);family bathroom; guest toilet and covered outside patio for easy entertaining, this house ticks all the boxes. – See more at: http://search.knightfrank.co.za/za5986#sthash.6W60O6JK.dpuf

That description misses out the swimming pool! For half the price you could pay this.

Valley View Lodge is a 120 Ha lifestyle lodge situated in the Swartberg Private Wildlife Estate, at the foot of the Swartberg Mountains in the Klein Karoo. The main house is a comfortable 4 bedroom, 3 bathroom family home with open plan living areas and beautiful views over the surrounding Swartberg Mountains. Two of the bedrooms lead to a patio with views over the terraced garden with pool. There is a separate one-bedroom cottage with a full en-suite bathroom and a fireplace in the lounge. – See more at: http://search.knightfrank.co.za/za5698#sthash.Q5yNf3bI.dpuf

The catch in Cape Town is the mention of a local security lodge as in the serious problem with crime there, but if we just stick to a bit of number crunching well it is hard to not mull this from Henry Pryor earlier.

Buying an average home in Victoria Road after next April as a 2nd home will cost £1,113,750 in Stamp Duty.

So one street in the Royal Borough of Kensington and Chelsea – admittedly the most expensive one – would give you enough money to buy both properties and maybe fill the swimming pool with notes with just the Stamp Duty. Even Einstein would have struggled with such a version of relativity as we consider the phrase, Go Figure!

The Reserve Bank of South Africa

It has applied conventional central banking methodology and done this in response to the currency decline. From its December Quarterly Bulletin.

Having raised the repurchase (repo) rate by 25 basis points to 6,0 per cent in July 2015, the Monetary Policy Committee  (MPC)  agreed on an unchanged rate in September, but at its meeting in November 2015 decided to raise the repo rate further to 6,25 per cent per annum.

Sobering in what we call a zero interest-rate world with negative tinges. Plainly a brake is being applied to the South African economy at what I will explain below is a bad time for it. But if we stick with interest-rates there are other problems as the ten-year bond yield has pushed above 10% meaning that any longer term borrowing is very expensive right now. In terms of its target this is what the Reserve Bank is aiming at.

the inflation target range of 3 to 6 per cent

Commodity Wars

The fall in commodity prices which is so welcome in many places is not welcome everywhere and South Africa is one of the latter.

In addition, mining production shrank for the second consecutive quarter, affected primarily by lower production of platinum and iron ore in the third quarter. Platinum production declined due to scheduled maintenance work at certain platinum furnaces as well as safety stoppages, while iron ore production was reduced in reaction to a global oversupply.

Something of a double whammy is at play here.

In general, mining production continued to be affected by declining international commodity prices and rising production costs.

Also we get a reminder of which commodities are in play.

the mining sector declined at an annualised rate of 9,8 per cent in the third quarter, largely brought about by decreases in the production of platinum, diamonds, iron ore and manganese ore. Production volumes of coal and gold mines, however, remained broadly unchanged over the period.

Precious metal prices have been in a bear market too and if Jon Stewart was right it is not a good time to be a musician right now.

People out there turnin’ music into gold
People out there turnin’ music into gold

Also agricultural output has been hit by a drought in an example of Shakespeares woes come in battalions and not single spies.


Yes but not as much as you might think.

Annual consumer price inflation was 4,8% in November 2015, up from 4,7% in October 2015

However there is goods price inflation of 3.8% which is quite an anti-achievement if you note all the commodity price falls leading to goods disinflation in so many other countries. Also the currency decline will mean that the heat is on in this area as we look into early 2016.

If we look for some perspective then the underlying index is at 116.5 where 2012=100.

Economic Growth

Actually a rebound in manufacturing means that South Africa has just had some.

. Following a contraction of 1,3 per cent in the second quarter of 2015, growth in real gross domestic product accelerated to an annualised rate of 0,7 per cent in the third quarter……. the level of real gross domestic production in the first three quarters of 2015 was still 1,0 per cent higher than in the corresponding period in 2014.

Apparently if you exclude the sectors which are shrinking then the outlook is brighter.

Excluding the contribution of the usually more volatile primary sector, growth in GDP would have bounced back from negative growth of 0,4 per cent in the second quarter of 2015 to positive growth of 2,2 per cent in the third quarter.


There is much to consider here as we see how a crisis in the financial sector impacts on the real one. Economic growth has slowed and remember this is the Africa which was supposed to be “boom,boom,boom” according to the mainstream media. If we look at this in terms of what you can buy from abroad then (h/t Renaissance Capital) GDP per capita has dropped from over US $8000 in 2011 to more like US $5700 now or back to 2009 levels.

There are of course other issues such as the endemic corruption and the presumably related energy crisis which is so bad there are regular black-outs. It even makes UK energy policy look a little better that is how bad it is! The political crisis and further falls in commodity prices have seen the Rand fall further whilst I have been typing this article and it has reached 16 to the US Dollar. Peak currency crisis? Maybe, but I am reminded of the relative house prices displayed today compared to my home country of the UK.

There should be a flow of money in to buy such things waiting and hoping for better days. In an individual sense this is good as it will support the Rand and maybe reestablish some sort of equilibrium. But also it comes with dangers as the fastest movers are likely to be vulture style hedge funds as we fear an outbreak of asset stripping. Time perhaps for some Freddie Mercury.

Are you ready, hey, are you ready for this?
Are you hanging on the edge of your seat?
Out of the doorway the bullets rip
To the sound of the beat

Another one bites the dust
Another one bites the dust
And another one gone, and another one gone
Another one bites the dust

But let us end on a more hopeful note with Florence and the Machine.

It’s always darkest before the dawn





Why is Canada even discussing negative interest-rates?

Yesterday there was quite a development in Toronto where Stephen Poloz the Governor of the Bank of Canada was speaking. Let me quote his words.

The fourth unconventional monetary policy tool I want to cover is negative interest rates, which is something you have heard a lot more about recently.

Not only recently Stephen as I have been discussing them on here since 2010! However the Bank of Canada does have a track record in this area so please join me in a trip in the TARDIS of Dr. Who back to April 2009 and the emphasis is mine.

On 21 April, the Bank lowered its target for the overnight rate by one-quarter of a percentage point to 1/4 per cent, which the Bank judges to be the effective lower bound for that rate.

We have been noting over the last 18 months or so that the “lower bound” has been slip sliding away especially as we note that every country which has implemented negative interest-rates has then cut them further. However there was a reason that the Bank of Canada thought that they were a bad idea in 2009.

In principle, the Bank could lower the policy rate to zero. However, that would eliminate the incentive for lenders and borrowers to transact in markets, especially in the repo market.

So if we translate that into ordinary persons English we see that like the Bank of England they were concerned about what zero interest-rates would do to the banking sector. It is always the banks for them isn’t it? Oh and the man signing off that report was called Mark Carney, whatever happened to him?

What about now?

A paper by two Bank of Canada economists ( Jonathan Witmer and Jing Yang) takes up the story.

Our best estimate for the effective lower bound is a target rate of around -50 basis points (bps).

So what has happened in the intervening six years or so which has changed their mind?

Since investors must pay to store large amounts of cash, the effective yield on cash is actually negative…..Cash storage costs, including direct costs of storage and insurance costs, are approximately equivalent to 25 to 50 bps per year.

I do like “must pay” as of course there is a choice which they miss. In reality there is a variety of choices where an ordinary person stuffing cash into either a literal or metaphorical mattress may consider the cost to be zero, or a drug dealer who will have very heavy costs laundering his cash.

But the fundamental issue here is that none of this has changed in the past six years so why has the Bank of Canada?

The absence of abnormal cash demand in Switzerland, for example, with the target rate at -75 bps, supports this possibility.

Ah okay so they now think that they can get away with it without unduly harming the banking sector! Also I note that something we have discussed on here many times has been noted.

In addition, many banks have not passed on the rate cut to mortgages.  This may be due in part to the banks’ desire to protect their interest rate margin.

So the central banks worried that negative interest-rates would hurt banks but now they discover they pass on the problem in the form of a rugby hospital pass and hurt the consumer their worries disappear. Ouch! Talk about revealing their motivation.

This reminds me of the biggest Sham 69 hit where you need to replace kids with banks.

If the kids are united then we’ll never be divided
If the kids are united then we’ll never be divided

If this was another industry failing to respond to downward price pressures by in effect forming a cartel would lead to investigation and prosecution but apparently different rules apply to banks.

We do get a burst of genuine honesty towards the end of the paper.

We do not know where exactly the ELB for the Bank of Canada policy rate is, nor do we know how long policy rates could stay negative.

But also in case we missed it a reminder of the “by the banks for the banks theme” and the emphasis is mine.

In such an environment, they should monitor the effect of negative rates on core funding markets, banks and other market participants.

Oh and you might have thought that the real economy might have got a mention at least somewhere…..

Forward Guidance

There are various issues here but Governor Poloz is either unaware of deliberately ignores the problem of proclaiming Forward Guidance and also telling people this.

This suggests that we have more room to manoeuvre in response to adverse shocks than we believed back in 2009.

So they were wrong about a basic point when giving Forward Guidance back then. Also in a world where confidence is fragile there is the issue of whether making such statements is damaging in itself. The human psyche can be mysterious and unpredictable and the same critique was applied to the former Bank of England Governor Baron King of Lothbury who was invariably downbeat.

Will people worry about the downbeat implications and be afraid be very afraid or concentrate on this.

In the Bank’s last Monetary Policy Report (MPR) in October, we forecast that the Canadian economy would return to positive growth in the second half of this year, and that annual growth would continue to increase in 2016 and 2017…..Canada’s outlook is encouraging.

So the future is so bright we are considering negative interest-rates in response to it? Even Governor Poloz can spot the flaw.

Given this outlook, it may seem like an odd time to be updating our unconventional monetary policy tool kit.

Mark Carney and the lower bound

The lower bound has been a very troubled area for the Bank of England Governor. Yesterday saw his Forward Guidance of 0.25% become -0.5% in Canada. Even worse for him he actually raised his estimate of the lower bound in the UK to 0.5%! Up was the new down for him and his behaviour was even odder because he did this as places in Europe were heading into negative interest-rate territory. He is lost in his own land of confusion on this subject.


The issue of the spread and indeed contagion of negative interest-rates is one that makes appearances in what might seem unexpected places. If pressed about this week I would have guessed Sweden,Denmark or Switzerland would be making the headlines. Also Canada had for a long time a relatively good credit crunch as the commodity price boom meant the problems seen elsewhere were underwritten. Along the way we saw “Peak Carney” as the UK establishment were seduced by such events and he saw a chance for personal improvement.

However now for all the rhetoric there are plainly issues as we note an oil price where the Brent Crude has tested US $40 more than once already this week. In addition the Bloomberg Commodity Index hit a low for this century. This led Governor Poloz to mull on these possibilities.

commodity prices could fall further as new supply weighs on prices…….even as the resource sector contends with lower prices.

We do not know what will happen next but we do know that it recent days the resource sector has seen even lower prices. A Black Swan for the previously serene Canada?

As we stand the situation remains relatively serene as the last GDP report showed annual growth of 2.3% albeit with a 0.5% fall in September. However  employment has dipped in the last 2 months as we wonder if Canada can continue to escape the pain that others have suffered in the credit crunch era? The currency has certainly got the message. From the Financial Times.

Loonie touches 11-year low




What are falling commodity prices telling us about the world economy?

One of the features of 2015 has been the fall in price of so many basic staples of life. By this I mean the price of energy metals and some foods. Putting it another way we have seen a sort of currency revaluation where most people can now buy more and often considerably more product for the same monetary outlay. This is certainly true for those who use the US Dollar and even the Euro’s fall has only offset part of it. This currency revaluation has spread to much of the world and only has a downside for those who are producers where places like Western Australia and the oil producers come to mind.

If we look at things this way and again look at the Euro area I note that Mario Draghi has again indulged in Open Mouth Operations to drive the Euro lower today and thereby offset some of the commodity price fall. Does anybody in authority even question the wisdom of this?

The price of oil

if there is an equivalent to “the spice must flow” theme of the novel Dune for the world economy it is the supply of oil. That is why so many wars have sprung up around the middle-east in recent times. However the latter part of 2014 saw a sea change in the pattern of the price of oil as it fell and fell to a nadir in Brent Crude Oil terms of just below US $50 as 2015 began. This was very different to the period where as we observed on here a Star Trek style tractor beam kept pulling it back to the US $108 level.

Whilst there have been fluctuations in 2015 we have seen a more stable overall pattern as well as lower low and we currently find Brent Crude Oil at the US $46 mark. This has driven both consumer and producer inflation lower and given the world economy quite a boost in 2015 even if we allow for the regions where it is a deflationary influence such as the Middle-East. Although in a theme for these times we have the question of why the world economy is not doing better and so many central banks are still running such an expansionary policy.

Dr Copper

I pointed out earlier this week that the price of copper has been partying just like it was in 2009. The copper future followed by the Financial Times has fallen into the US $2.21s which means that it is some 27% lower than a year ago. For consumers this is again a clear gain especially for anyone looking for electrical wiring.

Underlying this has been the change in the Chinese economy where we see a very opaque picture. This as regular readers will recall is due to the collateralisation and financialisation of copper over there and likely hypothecation. Anyway with apologies for the salvo of long words in essence the financial market input has also driven the boom/bust cycle here. Along the way we see that copper was for a while a form of money just like white goods and cars did in Greece except that one became so in a boom and the others because of fears of a bust.

Other metals

Dr. Copper has not lacked friends n its downwards journey. From Bloomberg on Tuesday.

Zinc for delivery in three months fell 2.3 percent to settle at $1,607 a metric ton at 5:50 p.m. local time on the LME. Prices touched $1,576, the lowest since July 2009 and are down 26 percent this year.

Only the day before Nyrstar had announced plans to reduce production of Zinc concentrate by 400,000 tonnes a year but as you can see it appears to have been a leaf in the wind. This morning markets were playing “And the beat goes on” by the Whispers according to Sober Look.

Spectacular selloff in industrial metals on the Shanghai Futures Exchange: aluminum, zinc, nickel, steel

The Commodity Research Bureau calculates a metals sub-index and it pushed above 1100 in the commodity boom of early 2011. Then it fluctuated over the next 3 and a bit years but drifted downwards into the 950s or so. But with a by now familiar sense of timing something changed in late July 2014 as “Down Down” by Status Quo became the musical theme as we note that the last reading was 562.49. Apart from one rally in late April this has been the sort of move that those who use trend charts must dream of!


The majority of people reading this- I mean those who are neither central bankers nor farmers- will be pleased to read that the price of foodstuffs has fallen too albeit not on the same scale as discussed so far. The peak was 513 in April 2011 and we now find ourselves at 358 with the majority of the fall happening since, surprise surprise, the summer of 2014. On that subject does anybody recall why food prices rose in early 2014?

Of course this does not always feed through into our pockets as the recent price increase by Starbucks in the UK showed. There are other influences.

Trading Places

Just when you thought that the Duke brothers Randolph and Mortimer were figments of a film-makers imagination what pops up? From Bloomberg.

Futures have soared 35 percent from a three-year low of $1.0345 a pound on Sept. 29 as investors weighed slowed demand against declining output. Brazil is the world’s top orange-juice producer, followed by Florida.

Yes forecasts from the US Department of Agriculture are involved as life imitates art. It gives me a wry smile to note that this is happening as Bank of England Governor Mark Carney mounts his PR campaign to tell us that all the past market rigging problems were misunderstandings and local difficulties and that it is different this time. Perhaps Mark would be better off ripping it up and starting again.


These indices are also hammering out a worrying beat. The Baltic Dry Index has halved since early August creating quite a severe bear market. Whilst it is a volatile measure a fall from 1201 to 599 does create food for thought as does the fact that it is down over 50% on this time in 2014. If we move to the more stable Harpex Index we see that 394 has replaced the 646 of the summer.


It is easy to sing along with REM after noting the developments in commodity prices.

It’s the end of the world as we know it
It’s the end of the world as we know it

However there are ameliorating factors if we look at what created the commodity price boom. China decided to go on a commodity buying warpath pushing prices higher. In addition to that bank trading desks thought if the Chinese want to pay up let them and drove prices even higher. Hence we had something of a false boom and now as well as the Chinese slow down we are seeing banks exit the market as the easy money has gone.

In this I see a genuine danger which is not the deflation mania in much of the media. It is that in spite of the protestations of regulators and central bankers there are many derivative positions still around and the one thing that writers of such positions do not like is extreme volatility. If you are looking for a canary in this particular goldmine may I suggest noting developments like this from the Financial Times.

Glencore shares on the wrong side of £1 again

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?


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.