Tuesday, May 03, 2011

What does "high" mean?...

Record prices in many commodities like sugar and copper feed our availability bias to conclude we are experiencing unprecedented costs. Actually, we are close to where we started over a century ago. But have we shifted long term downtrends for commodities?  This graph gives me pause.


Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution. [More]
The instinctive or at lease, accepted response is to smell inflation but as I have pointed out before, it is very hard to have inflation if wages cannot grow - consumption simply shifts because there is only so much money in consumers' hands. With 9% unemployment wage pressure is tough to imagine.  This is pretty much what recent data suggest.


What is striking is the very long term decline has been essentially erased in the last few years. I'm not sure this is a paradigm shift, since energy uses and sources are in high flux. But if it isn't - think about where prices would revert to on the above chart!

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