Monday, December 27, 2010

Krugman on Commodities

At risk of making this a Krugman fan blog, I will once again refer to one of his pieces, today discussing commodities and inflation in which he dispels the commodity-as-inflation myth.  He points to the fact that the commodity markets are global and prices reflect demand from emerging markets.  Here's some more proof.  First, let's look at an oil chart:

Bang!  Look at that rise, exactly as expected.  You will note that, just as Krugman explains, this is a global commodity, priced in dollars that has appreciated significantly in the last six months.  Now, let's take a look at "natural" gas (I will explain the quotes there in a subsequent post).

Gas is a domestic commodity, traded for domestic consumption only.  It can be argued that, since gas is a primary input for electricity and industrial production, it is a reflection of the current economy.  In normal economic times, one would expect to see significant seasonal increases in prices as demand increases for residential and commercial heating.  But, as Lee Corso would say, not so fast my friend!  If we were seeing the inflation the righties have been foretelling, surely we'd see a dramatic rise in gas prices.  Maybe they're just wrong, or lying.

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