This chart has been making the rounds, right into my email via Business Insider’s Chart of the Day. Due to confirmation bias (the bias towards ignoring information that is not consistent with something else you believe), I didn’t post it or examine it further. (Remember, confirmation bias is not something that strikes once or twice a day, it’s a way of life.) So anyway, I found additional information via Members’ chat, and will now present both sides. – Ilene
"Global Commodity Prices Track World Demand"
Courtesy of Mark Thoma, Economist’s View
Fed Views, by Reuben Glick, SF Fed: …Global commodity prices have followed global economic activity as measured by world industrial production. Commodity prices fell during the recent recession and rose with the recovery, which increased demand for raw materials, particularly from developing countries such as China. In fact, increased demand from developing countries accounts for most of the increased world demand for commodities such as oil, wheat, and corn over the past decade. In the case of corn, a substantial amount of increased demand also reflects its use in ethanol production. …
More on that commodities vs global demand chart
By Cardiff Garcia, ft.com/alphaville
Excerpt:
More than anything, this reminds us of the “missing chart” that we stole from John Kemp and wrote about a little while back:
(The first chart only shows the performance of non-energy commodities, but oil prices in recent years have followed a similar trend — rising through 2007 and plummeting when global growth came to a halt, then climbing again when growth resumed.)
Kemp’s point was simple: if you argue, based on the inflection point in the graph, that QE2 had some of its intended effects on inflation expectations and on certain asset markets, then you should also acknowledge the policy fed through to higher commodity prices. Well, we’ve made this argument and we think he’s got a point.
So how to reconcile the two charts? The first chart sends the message that QE2 has little to do with higher commodity prices; it’s driven by global supply and demand factors…
The second chart seems to indicate that central bank policy does have at least some impact — not just on the variables it wants to influence but on those it would rather not. Maybe the Fed can’t do much to stem rising prices, but it can do something. Of course, that something would entail tighter monetary policy despite still-high unemployment and a domestic economy whose recovery is starting to look tenuous.
John Kemp dismantles the commodities vs global demand chart
Excerpts:
Well, Kemp spotted the San Fran Fed’s chart too, and his column this morning includes a devastating critique of the way it was constructed.
We quote liberally:
FedViews presents a graph entitled “Commodity prices track world demand”. It uses a measure of world industrial production from the Netherlands Bureau for Economic Policy Analysis (CPB) and non-energy commodity prices from the Commodity Research Bureau (CRB). …
FedViews concludes “Global commodity prices have followed global economic activity as measured by world industrial production … Commodity price swings have a direct impact on headline inflation … [but] have had only a small effect on underlying inflation”.
Unfortunately, the chart is profoundly misleading. Its use of different scales on the vertical axes and decision to show changes only since 2000 gives a grossly distorted view of co-movements in commodity prices and industrial output.
I have attempted to reproduce the FedViews chart (Chart 1). It is not clear what time series the Fed used for “non-energy commodity prices”. I have used the Thomson Reuters/Jeffries CRB Non-Energy Total Return Index <.TRJCRBNETR>.
This is not quite the right the measurement of commodity prices since it is based on futures prices rather than cash commodities and includes an impact from roll returns which are not relevant in this context. But it produces the same shape as the original (http://graphics.thomsonreuters.com/ce/CORRECTED-CHARTS.xls).
In the Fed’s illustration, commodity prices appear to move closely in line with world industrial production. Both vary by about the same amount. If anything non-energy commodity prices have risen slightly less than would be expected given the big increase in industrial production between 2000 and H1 2008, and then again since 2009.
But that is an illusion produced by the choice of different scales for the two series, which produces a pleasing graph but grossly distorts reality. If the graph is corrected to show both series on the same scale it is immediately apparent commodity prices have been far more volatile than industrial production and consumption (Chart 2).
World production rose 18.5 percent between January 2009 and January 2011, according to the CPB measure. But non-energy commodity prices soared 72 percent over the same period, according to the CRB total return index.
FedViews is taking a short-term view of commodity prices and production that fails to account for longer-term trends. If the graph is corrected to show longer time series for both production and prices it becomes apparent there is no close correlation. Between January 1994 and July 2008, world industrial production rose 72 percent but commodity prices increased 176 percent (Chart 3).
Quite a difference… And he’s not finished:
PROTESTING TOO MUCH
There is a relationship between industrial production, but it is not linear, and industrial production is not the only or even the predominant influence on prices.
Researchers at the European Central Bank and International Monetary Fund have shown co-movements among commodity prices, as well as with industrial production, and measures of global liquidity (monetary policy). Supply-side variables such as investment, spare capacity and inventories are crucially important in explaining non-linearity.
Strong demand in emerging markets is clearly playing a central role in pushing up prices for a whole range of fuel and non-fuel commodities. But in its rush to downplay the inflation threat and exculpate the Federal Reserve from charges it is responsible for rising raw material prices, the SF Fed and other policymakers, including Bernanke, are presenting an oversimplified and potentially misleading view of how commodity prices behave. …
In contrast to FedViews, there are strong and credible arguments linking rising commodity prices in part to cheap money policies favoured by the Fed (through a combination of excess liquidity, impact on expectations, and the export of excessively loose monetary policy to emerging markets via the system of fixed exchange rates).
Global commodity inflation may or may not feed through into consumer prices (the degree of pass through has surprised Britain’s central bank but seems modest in the United States, at least so far). Some degree of commodity-driven inflation may be beneficial, according to those who worry more about deflation and unemployment.
There are legitimate discussions to be held about pass-through rates and the nature of output gaps. But the question of commodity prices and monetary policy needs to be discussed with much more frankness than the Fed has managed so far. Charts with misleading scales do not help.
We remain completely in the dark about whether those “strong and credible arguments” referenced above are actually right. But whatever your views on the efficacy of QE2, Kemp is absolutely right about the importance of methodological soundness in arguing one way or the other…. Click here for the full article.
Source: COLUMN-San Francisco Fed gets confused on commodities: John Kemp
