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What is this inflation indicator saying?

Jan 7, 2010

It is believed that if you want to track inflation, you should track copper prices. Historically, copper prices have proved to be a reliable indicator of inflation. The reason may not be hard to find. Copper is an excellent conductor of heat and electricity. Thus, it is perhaps used in the widest variety of consumer goods. It finds applications in goods ranging right from the basic plumbing materials to cars and super computers. Thus, if copper prices are rising, it would mean that an economic recovery is underway and inflation is about to show up on the horizon.

Copper prices have been climbing steadily over the past few months. Recently, they broke into new highs of the current rally. Hence, does this signify that a major inflationary environment could be upon us?

It is well known that the argument before we entered 2010 was whether we are staring at a deflation or an inflation caused by money printing by central banks. Barely a few days into 2010 and we are getting some sort of signals from the way copper prices are behaving. However, a short-term movement in copper prices could also be because of some other factors. Thus, we may have to wait for the trend to sustain itself for some more time.

However, the buzz around rising inflation is getting hard to dismiss. In India too, investors seem to be warming up to commodity producing companies. Quite a few steelmakers have seen their prices spike in the past few trading sessions. Same is the case with producers of non-ferrous metals. Are we seeing sector leadership changing hands here? Well, only time will tell.

The flawed concept that is destroying America
Paul Krugman is one of the most respected economists of our times. And is also a Nobel Laureate to boot. Hence, it is not every day that such economists come under fire. Dr Ron Paul, a Republican Congress member from Texas has come down rather heavily on Krugman and others of his ilk who believe in Keynesian economics. Ron Paul opines that infatuation with Keynesianism has delivered a decade of zero to the US economy as it has gone nowhere in real terms in the last decade.

He further argues that the US policymakers should start listening to the Austrian free-market economists if the US economy has to make anything of the current decade. The Austrian school of thought, he believes, is based on some extremely common sense principles and does not believe in the nonsensical theory that one can spend one’s way out of a recession.

Indeed. There is enough empirical evidence at hand to prove that what most of Mr Paul is saying is true. Every time the US economy has gone under, the authorities have responded by loosening monetary policies and encouraging creation of more paper money by relaxing lending standards. But this has helped to only postpone the pain and not completely get rid of it. And things could be no different even now. By injecting record amounts of cash into the system, the US Fed has once again managed to push the problem in the future and has not made any attempt to tackle it head on. Needless to say, when the problems will return, they will be bigger than ever. Clearly, the US economic model seems to have broken down and is in need of some major overhaul.

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1 Responses to "What is this inflation indicator saying?"

Ordinary Taxpayer Joe

Jan 7, 2010

I think the writer is on to something!

Government DOES NOT produce but ONLY CONSUMES!
Free market works...

Got less government?

Equitymaster requests your view! Post a comment on "What is this inflation indicator saying?". Click here!

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