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.

 

 

 

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.

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.

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.

 

Catastrophic depopulation in Russia and Japan

The World Bank provides population projections for all countries through 2050. Figures 1 and 2 display the evolution of population in Russia and Japan. Both projections look catastrophic. Population shrinks with acceleration. The birth rate is always lower than the death rate.

Figure 1. Depopulation of Russia and Japan: 2010 to 2050.

Figure 2. The rate of birth and death in Russia and Japan: 2010 to 2050

 

Russia will never catch up

Labor productivity is the economic parameter that is practically the best to characterize the level of technical development and human capital. The Total Economy Database lists various estimates of productivity for many countries. For Russia,  only GDP per person employed in 1990 Geary-Khamis 1990 $ is available since 1989. For the USSR, the TED provides a virtual time series since 1960. Here, we address the question of evolution of labor productivity in Russian Federation (RF) relative  to the USA. Figure 1 depicts two original curves which reveal the sadness of the current evolution of labor productivity in Russia: the slope of the Russian curve is lower than that for the USA curve. In the long rung these curve diverge. Thus:

  

Labor productivity in Russia will never catch up that in the USA.

 

Figure 2 presents a different view on these curves. The difference in labor productivity had been increasing linearly for the USSR and suffered an accelerated increase between 1990 and 2005. A few years of extremely high oil price corrected the deviation down but the current evolution is likely returning to the long term trend - the gap grows with time.

 

Figure 3 demonstrates that in relative terms labor productivity in Russia is still lower than it was in the USSR. It will take another ten years to get to 1/3 of the US productivity. Discouraging story.

 

 

Figure 1. The evolution of GDP per person employed in the USA and Russia.

 

 

Figure 2. The differences in labor productivity in the USA and  Russia/USSR.

Figure 3. The ratios of labor productivity in the USA and  Russia/USSR.     













  

The error of the CPI estimates in Japan runs away

A month ago I wrote about the difference between two inflation measures as expressed by the consumer price index (CPI) and the GDP deflator in Japan. It was shown that the difference between these two indices increases over time. In this post, I add couple graphs to demonstrate that the difference diverges as time squared. Figure 1 displays the difference between the GDP deflator and CPI since 1985. One may observe that the slope of the difference increases with time approximately every five years, i.e. when new basket for CPI is introduced. In Figure 2, we approximate the difference with a quadratic function of time. The difference is running away, i.e. the error in the CPI estimate runs away since the GDP deflator completely includes the CPI.

 

Figure 1. The difference between the CPI and GDP deflator

 

 

Figure 2. Approximation of the difference between the CPI and GDP deflator by a quadratic function of time

 

This is how the Japan Statistics explains the difference between CPI and the GDP deflator:

 

Compared with the recent movement of the CPI and that of the GDP deflator, the range of drop of the GDP deflator has been larger than that of the CPI. The discrepancy between the CPI and the GDP deflator is mainly ascribable to the different things they cover. Other causes of the discrepancy include, among others, the different calculation formulae employed.

 

(1) The Target
While the CPI focuses only on household consumption, the GDP deflator covers business investments in equipment, etc., in addition to household consumption. Since much of the investment in equipment today is made in information technology goods, whose quality is rapidly improving, price falls in such goods considerably affect the deflator. For this reason, the change ratios of the deflator tend to be lower than those of the CPI.
Also, while the prices of petroleum products and other imported goods are rising, the CPI is usually pulled up. On the other hand, the deflator tends to drop until such price hikes are all reflected in the relevant product prices. Thus, the discrepancy between the two grows wider.
If the scopes of the two indices are narrowed down to cover the same items as far as possible, i.e., if we compare the CPI for “All items” with the GDP deflator for “Final household consumption expenditure” alone, the two indices show quite similar fluctuations.

(2) The Formula
While the CPI calculation employs the Laspeyres formula, the GDP deflator employs the Paasche formula. Generally, the Paasche formula, which calculates a weighted average using the quantitative weights at the time of comparison, tends to provide a lower index, while the Laspeyres formula, which employs quantitative weights at reference period, usually produces higher values. In addition, since quality improvement is reflected in the form of an increase in volume, Paasche formula gives a larger weight to an item whose price has fallen due to quality improvement. For this reason, the rate of decline of the GDP deflator, which employs Paasche formula, tends to be getting larger.
Also note that the GDP deflator employs a “chain method” with the reference periods it updates weights annually, to minimize the bias accompanying calculation of the index. Such a chain method is also used with the CPI as well, to provide and publish an additional, referential value to the index.