Inflation adjusted charts
Eoin Treacy's view
Inflation adjusted charts - The Chart Library has
an extensive section devoted to inflation adjusted charts which takes an instrument's
price and divides it by the US CPI Index for US denominated assets. While we
do not have the ability to rebase scales to show current prices relative to
peak prices, the shape of these charts is reflective of how prices have performed
when adjusted for a common measure of inflation. They are at their most useful
over a long timeframe, allowing us to see how today's prices compare with peaks
reached during the last really big inflationary scare in the 1970s. Here are
some examples.
The Inflation-adjusted
chart for the Continuous Commodity Index
deteriorated steadily from 1974 until 2003. It has trended higher over the last
almost 8 years and a sustained move below the October 2008 lows would be required
to question potential for continued upside.
Gold
has trended steadily higher in inflation adjusted terms since 2001 and continues
to set new recovery highs. While somewhat overextended in the short-term, a
sustained break of the progression of higher reaction lows, currently near 5
on this chart, would be required to question the secular uptrend.
Silver
formed a first step above it long-term inflation-adjusted base from 2006 and
broke upwards in August. A sustained move back below 0.9 would now be required
to question medium-term upside potential.
Corn,
Soybeans, Wheat,
Oats, Cocoa,
Arabica Coffee, Sugar,
Live Cattle, and Cotton
are all in varying stages of base formation completion.
These
charts do not tell us how high the respective commodities might rise in nominal
terms over the coming years. However, they clearly illustrate that commodities
were a successful hedge against inflationary pressures during the 1970s and
are looking likely to provide the same type of haven in a future inflationary
period.
The fact
that so many commodities are breaking out of long-term bases in inflation adjusted
terms suggests that it is now a matter of when rather than if this form of inflation
will become again become a pressing issue for investors. This is in sharp contrast
with the pronouncements of various central banks who continue to say that deflation
is a more immediate risk. However, with the price of just about every essential
raw material breaking upwards, it is inevitable that producer and consumer price
measures will reflect these increases at some point. A number of Asian and Latin
American countries are already feeling the effects of heightened inflationary
pressures. In 2011, Europe and North America are potentially at risk from stagflation.