Optimism on China from Goldman Sachs |
| The Two Most Important Variables for 2030--Part 2
November 15, 2005
The fall in today's core PPI raises the broader question about what's happening to global inflation. Jack Treynor (President of Treynor Capital Management, Inc. and editor of the Financial Analysts Journal from 1969-1981), has an interesting piece in the latest Financial Engineering News where he suggests that the inflation rate for tradeable goods is on the way down:
The steady decline in yields on long-term bonds reflects a falling inflation rate in tradable goods, which include commodities like copper, steel, wheat and soybeans (although, in our evolving world, automobiles and consumer electronics have also become tradable goods) – a global, rather than a local phenomenon. When it gets too low, tradables inflation consequently represents a global, rather than a local, threat. Because the prices of tradable goods reconcile global supply with global demand, they have their own inflation rate. This rate affects local inflation rates without being affected by them in return and therefore has its biggest impact on the longest maturity bonds. When local inflation gets dangerously low, countries can escape from so-called liquidity traps by devaluing their currencies. But this remedy is not available when tradable inflation gets too low. This is a time for central bankers to be extra vigilant.
Is the inflation rate for tradeables really falling?
TrackBack URL for this entry:
Wouldn't monetary theory suggest that *low* inflation in tradable goods would be offset by *higher* inflation in local goods & services?
Wouldn't inflation rates as reflected in the long bond be based on a composite of the tradable and local goods?..or am I missing something here?
Posted by: David Foster at November 15, 2005 11:12 PM
It depends on the size of the locality. Local as a common currency area, including currency pegs, would be reflected in long bond rates but areas smaller than this would not as currency could flow beyond these boundaries. Long term commodity prices have fallen over time although subject occasionally to considerable jumps like that in oil.
Posted by: Lord at November 16, 2005 04:38 PM