11/30/13

On further fall in copper price


Since 2008, we have been reporting that the evolution of various components of CPI and PPI in the United States is not a random process but rather a predetermined one with long-term sustainable trends [1, 2]. Using these trends, one can predict consumer and producer price indices for various goods, services and commodities.  For example, in [3, 4], we presented the evolution many goods and services with varying weights in the CPI. There are more goods, services, and commodities of interest for producers, consumers, and investors. Here we revisit the index for copper ores. This is an example showing that some commodity prices are not well predictable.

Figure 1 displays the difference between PPI and the index for copper ores since 1988. This difference has a remarkable history: no big change between 1988 and 2003, and then a sudden surge in the copper index started. The peak was reached in the middle of 2006. It survived before the second quarter of 2008. Then the copper index dropped by almost 300 units back to the PPI level. In 2009, the PPI of copper increased above 500.  One may consider these changes as associated with the rise-fall cycles in oil price, but there is no one-to-one correspondence.

We have to admit that there is no sustainable trend in the copper index and the future of the copper ores index cannot be predicted in the long run. Currently, the difference is right in the middle between the previous trough and zero line. Moreover, it has reached the level of the previous local peak in 2007 (see Figure 2 for relative prices). Therefore, the PPI of copper may go any direction in 2014. I would refrain from buying/selling this commodity before the next clear sign of the future evolution. Considering the overall fall in commodities (oil, various metals, grains, etc.), I would not exclude further fall in the PPI of copper.

Figure 1. Evolution of the price index of copper ores relative to the PPI. 
 
Figure 2. Evolution of the difference of the PPI and price index of copper ores normalized to the PPI. Both troughs have the same depth.  

Food is getting cheaper


This is an annual update. We continue reporting on and predicting the evolution of the difference between the core consumer price index (CPI) and the index for food (less beverages).  Previously, we confirmed in many posts (see this blog) and papers [1, 2] that this difference had been following a long-term negative and linear (time) trend since 2001.  Originally, we predicted a turn to a positive trend in 2014. Two years ago, we expected the turn to a positive trend in 2012. Currently, we have new estimates of the core and food CPI through October 2013and can re-estimate the duration of the negative trend and its bottom value. For an investor dealing with commodities, the index of food, which continues to grow at a rate higher than the core CPI, is an important reference for any action. Food price affects not only economic but also social and political processes.

Figure 1 depict the most recent period. In 2008, when we first addressed the issue of sustainable trends in CPIs, the trend line was much steeper than now and intersected the zero line in 2014.  This was our initial estimate of the turning point for the negative trend. The zero line was considered as a natural level of resistance.  In the beginning of 2009, the difference reached the bottom and turned to a positive one, although not for long. The growth in food prices restarted in 2010. In the end of 2011, the difference had a short stop which we likely misinterpreted as a manifestation of the transition to a positive trend. Since October 2011, the difference has not been changing much with just a slight positive trend. This segment might manifest the major turn to the overall food price fall.

There are three possibilities of the future evolution. Firstly, we consider the probability of the turning point in 2013-2014 to be high.  Secondly, it is not excluded that the difference may suffer a further slight fall before it reaches its absolute historical minimum observed in 1979. Figure 2 illustrates this assumption and implies that with the current values at the level -3.0 and the bottom was at -8.5. Thirdly, the bottom value may be expressed in relative values. Figure 3 displays the difference between the core and food CPI normalized to the core CPI. In relative terms, the minimum was in 1974 and much deeper than in absolute terms. Falling along the current trend the normalized difference will reach the bottom only in the 2020s. This is the worst case scenario involving a significant rise in food prices through the 2010s. 

The first version is supported by the evolution of the producer price of grains in Figure 4. This price has been falling relative to the PPI since August 2013. The price of grain should affect the overall consumer price of food, likely with some delay. This facilitates the realization of the first scenario. Then food will be getting cheaper relative to the headline CPI.
Figure 1. The difference between the core CPI and the price index of food since 2002.  
Figure 2. The difference between the core CPI and the price index of food between 1960 and October 2013.
Figure 3. The difference between the core CPI and the price index of food normalized to the core CPI.  
Figure 4. The difference between the PPI and PPI of grains normalized to the PPI. The PPI of grains rapidly falls relative to the PPI since August 2012.

11/27/13

Price of steel and iron will be declining another three years


Five months ago we revisited the previously predicted fall in the producer price index of steel and iron in the first half of 2013 and formulated the hypothesis on the evolution in 2013-2016: “We foresee that the difference will be growing fluctuating around the green line till 2016. The price of iron and steel will be declining further before the difference reach ~10 to 20.  It is time to revisit our prediction.  

Originally, we reported on the difference between the overall PPI and the PPI of steel and iron in 2008. Then we revisited the difference in 2010, February 2012, December 2012, and August 2013. We predicted the index of steel and iron to return to the long term trend, which express a higher rate of growth of the producer price index than that of steel and iron. Our general approach is based on the presence of long-term sustainable (linear and nonlinear) trends in the evolution of the CPI and PPI in the United States [1, 2]. The difference between various components of these indices is not a random one but is rather a predetermined process. Using these trends, one can predict consumer and producer price indices for select goods, services and commodities.  

Figure 1 displays the difference between the PPI and the index for iron and steel (BLS code 101). The difference is characterized by the presence of a sharp decline between 2001 and 2008. Between 1985 and 2000, the curve fluctuates around the zero line, i.e. there was no linear trend in the absolute difference. In 2008, our main assumption was that the negative trend observed before 2008 should start transforming, after a short period of large fluctuations, into a positive trend after 2010. In Figure 1, the (originally expected) new trend is shown by green line. This trend suggests that the PPI grows faster than the index of steel and iron by approximately 2 units of index per year.  

Figure 2 demonstrates the most recent period and confirms that our prediction for 2013 was correct – the difference fluctuates around the green line. Therefore: 

We confirm our early prediction that the price of iron and steel will be falling through 2016  before the discussed difference reach ~10 to 20.  Investments in iron and steel related assets are likely not profitable.  
 

Figure 1. The difference of the PPI and the index of steel and iron updated for the period between November 2012 and October 2013. The green line was first introduced in 2008.


Figure 2. Same as in Figure 1 for the period between January 2005 and October 2013. Green line predicts the evolution of the difference after 2008.

11/22/13

Price of nonferrous metals will decline into 2015. Aluminium price will likely reach its bottom in 2015.

This is a regular revision. We have been following the evolution of several price indices of metals since 2008. Our general approach is based on the presence of long-term sustainable (linear and nonlinear) trends in the evolution of the CPI and PPI in the United States [1, 2]. The difference between various components of these indices is not a random one but is rather a predetermined process. Using these trends, one can predict consumer and producer price indices for select goods, services and commodities. 
 
In this post, we revisit the trends in the PPI of nonferrous metals. Originally, we reported on this item in 2008 and then revisited in 2010 and February 2012. The index for non-ferrous metals (102) shows an example of the absence of sustainable trends in the difference (see Figure 1). The curve is rather a comb with teeth of varying width. Although varying, the distance between consecutive troughs is several years at least. 

We predicted that the index of nonferrous metals had to fluctuate with large amplitude around the PPI and grew at a lower rate than PPI during 2012 and 2013:  Considering the observation that the rate of growth was approximately 3 points per month since February 2012 one may expect the level of -10 in approximately 10 to 12 months, i.e. in September 2013.” 

In reality, this difference was at -36.6 in October 2013. There was an overall fall during 2013. Therefore, the difference will follow the schedule (linear trend) marked by green line and likely extend into 2015.  

The producer price index of aluminum base scrap has to follow the same trend, as Figure 2 shows. However, the liner trend will intersect the zero line in 2015 and the potential for further fall might be exhausted.  

The price of aluminum will be decreasing in 2014 but likely reach its bottom in 2015. 


Figure 1.  The evolution of the difference between the PPI and the index of nonferrous metals from 1985 and October 2013. There are no linear trends in the difference, but its behavior demonstrates a clear periodic structure with relatively deep but short troughs, which reflect the fast growth in the PPI for nonferrous metals.



Figure 2.  The evolution of the difference between the PPI and the index of aluminum base scrap from 1985 and October 2013.
 
 

 

11/21/13

Consumer price inflation, headline and core


We have been routinely reporting on the difference between the headline and core CPI since 2008. Figure 1 illustrates our general finding that this deference can be well approximated be a set of linear trends. The last trend likely finished in 2009. That’s why we expected a new trend to evolve since 2011 into the late 2010s.

The U.S. Bureau of Labor Statistics has reported the estimates of various consumer price indices for October 2013. Figure 2 shows the predicted trend and the actual difference since 2002. The difference has been fluctuating around zero between in 2009 and 2011 and then showed a turn to the predicted trend.  Essentially, the zero difference suggests that the core and headline CPI are practically equal and evolve at the same monthly rate, i.e. the joint price index of energy and food has been following the price index of all other good and services (the core CPI) one-to-one.

Currently, the price index of energy slowly falls together with oil price. We expect them to fall deeper and thus the headline CPI to decelerate a bit together with energy. If the core CPI will retain its current cohesion with the headline CPI, we will have a period of very low inflation in all goods and services less energy and food. 

Figure 1. Two trends in the difference between the healine and core CPI.



Figure 2. The evolution of the difference between the core and headline CPI since 2002.

11/20/13

The Fed does not affect unemployment


 

B. Bernanke gave a talk yesterday. We presented quite a few arguments (e.g. here) why the Fed cannot control inflation with all instruments like rates and QEs. Here we present a simple case showing that the Fed does not affect the rate of unemployment as well. Comparing three recent trajectories of unemployment fall after it peaked. The dry residual is that nothing has changed with the negligible overnight rate and the money poured into the system.  Literally, there is no reaction at all.  

The rate of unemployment, u, was very high (10%) in 2009. It was recognized by the Fed and economic community that the fall in this rate is too slow historically and the Fed has to take some immediate measures to expedite the reduction to, say, 6.5%. Such measures were taken.

Figure 1 shows the evolution of u since 1980. There were two major peaks in 1982 (10.8%) and 1992 (7.8%). (All rates are seasonally adjusted.) Let’s compare the fall trajectories. When the troughs preceding the peaks are synchronized all three descending curves look very similar. This observation says that the current fall in u is not different from the previous. With or without QE, unemployment falls at the same rate.

It also tells us a fairy story about the near future. This rate will fall into the second half of the 2010s. Meanwhile, it may fall to 6.0% in 2013 or in the first half of 2014.

 

 
Figure 1. The rate of unemployment in the US 

Figure 2.  Two previous major peaks synchronized with the most recent. The length of fall is approximately 7 years.

11/17/13

Did we predict low inflation in the US seven years ago?

Todd Clark and Saeed Zaman from the Federal Reserve Bank of Cleveland wrote a few  days ago:
"Many observers have been surprised by the decline in consumer price inflation that has occurred since early 2012. "

Seven years ago we first presented a model predicting the rate of  US inflation at a ten year horizon. The paper was published by the Society for the Study of Economic Inequality (ECINEQ) and ended by the following statement: "The current period of disinflation will probably transform into deflation starting 2010-2012."
 
Since the model is based of labor force projections, the accuracy of inflation prediction critically depends on the precision of labor force estimates. Another paper introduces a corrected labor force estimate and  states that the rate of inflation will be close to zero during the next five years.  
 
On December 7, 2013 this model will be presented at the Conference "Inflation Developments after the Great Recession - A Euro Area Business Cycle Network (EABCN)" 
 hosted by the Bundesbank and sponsored by the EABCN.







 

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