Commodities and inflation relationship

The Effects of Inflation and Interest Rates on Commodity Prices

commodities and inflation relationship

It is critical to understand the correlation between inflation and commodity prices and the effects of inflation on commodity prices themselves. After an introduction, the paper discusses the theoretical relationship between commodity and consumer prices and the conditions under which, in general, one . There are many different ways of investing in an inflation theme or to hedge inflation. One such way is by having exposure to commodities or companies of gold is 80% - which is not a perfect correlation but certainly on the.

When more money is added to the money supplythis dilutes the value of the currency. The value of the dollar erodes and the excess liquidity starts sloshing around the economy driving up prices. Central banks and governments use inflation as a way to pay off their debts with cheaper dollars in the future.

commodities and inflation relationship

This leads to higher prices at the gas pump and higher prices at the grocery store. If you have the money to invest, you must hedge against inflation and protect some of your wealth. If you look at recent history, you know that the government probably is not going to get its act together anytime soon. You also know that the Federal Reserve and other central banks are not going to stop printing money until the system either collapses or some other system takes over.

Because of this knowledge, you know that inflation will continue to be a part of the economy. If you will take some of your money and invest in commodities like gold and silver, you can hedge against inflation. Analysts were expecting GDP growth of 2. Quantitative Tightening Quantitative Tightening is the opposite of quantitative easing which took place after the global financial crisis of At that time, there was a contraction in overall economic activity and the monetary authorities wanted to encourage spending.

What is the velocity of money? Simply defined the velocity of money is the turnover in the money supply. But from that we can infer their motives and perceptions of the economy in general… for instance generally in times of high inflation people want to spend their money as quickly as possible before it loses too much purchasing power. The Fed often emphasizes the price inflation measure for personal consumption expenditures PCEproduced by the Department of Commerce, largely because the PCE index covers a wide range of household spending.

People's expectations and perceptions cannot offset this destructive process. It is not possible to alter the facts of reality by means of expectations. The damage that was done cannot be undone by means of expectations and perceptions.

  • Inflation and Commodity Prices

Some economists, such as Milton Friedman, maintain that if inflation is "expected" by producers and consumers, then it produces very little damage. According to Friedman, if a general increase in prices can be stabilized by means of a fixed rate of monetary injections, people will then adjust their conduct accordingly. Consequently, Friedman says, expected general price increases, which he calls expected inflation, will be harmless, with no real effect.

The Effects of Inflation and Interest Rates on Commodity Prices

Observe that, for Friedman, bad side effects are not caused by increases in the money supply but by its outcome — increases in prices. Friedman regards money supply as a tool that can stabilize general increases in prices and thereby promote real economic growth.

According to this way of thinking, all that is required is fixing the rate of money growth, and the rest will follow. The fixing of the money supply's rate of growth does not alter the fact that money supply continues to expand.

This, in turn, means that it will lead to the diversion of resources from wealth producers to non—wealth producers. The policy of stabilizing prices will therefore generate more instability through the misallocation of resources. Now, if for a given stock of goods an increase in the money supply occurs, this would mean that more money is going to be exchanged for a given stock of goods.

Obviously then the purchasing power of money is going to fall, i. In this case the general increase in prices is associated with inflation. But now consider the following case: Consequently, the prices of goods on average don't change.

commodities and inflation relationship

Do we have inflation here or don't we? For most economists, if an increase in the money supply is exactly matched by the increase in the production of goods, then this is fine, since no increase in general prices has taken place and therefore no inflation has emerged.

We suggest that this way of thinking is false since inflation has taken place, i. This increase cannot be undone by the corresponding increase in the production of goods and services. For instance, once a king has created more diluted gold coins that masquerade as pure gold coins he is now able to exchange nothing for something irrespective of the rate of growth of the production of goods.

Regardless of what the production of goods is doing, the king is now engaging in an exchange of nothing for something, i. This diversion is possible because of the increase in the number of diluted coins, i. The same logic can be applied to paper-money inflation. The exchange of nothing for something that the expansion of money sets in motion cannot be undone by an increase in the production of goods. The increase in money supply — i.

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According to Rothbard, The fact that general prices were more or less stable during the s told most economists that there was no inflationary threat, and therefore the events of the great depression caught them completely unaware. The general increase in prices as a rule develops because of the increase in money. The harm that most people attribute to increasing prices is in fact due to increases in money supply. Policies that are aimed at fighting inflation without identifying what it is all about only make things much worse.

Inflation and Commodity Prices

When inflation is seen as a general increase in prices, then anything that contributes to price increases is called inflationary. It is no longer the central bank and fractional-reserve banking that are the sources of inflation, but rather various other causes. In this framework, not only does the central bank have nothing to do with inflation but, on the contrary, the bank is regarded as an inflation fighter.

On this Mises wrote, To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick.

commodities and inflation relationship

They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes.

They never mention this increase. They put the responsibility for the rising cost of living on business. This is a classical case of the thief crying "catch the thief. See Friedman's Dollars and Deficits: