Costs of intermediate goods, those used in earlier stages of production, rose 1.2 percent last month and are up 9.3 percent in the 12 months ended in January. Prices of raw materials, or so- called crude goods, fell 0.5 percent and were up 23.6 percent in the last 12 months.
Crude goods prices are up 23.6% in twelve months! These are the goods that are furthest away from the consumer in the structure of production, the higher order goods. They are used primarily to make the capital goods which, themselves are needed to make and move lower order goods, consumption goods, to there final destinations.
Among other characteristics they are very sensitive to the business cycle. You might even say that they are the clearest evidence of it.
When the boom begins they rise to the sky and everyone is feeling groovy. When the inevitable bust appears, they get crushed the worst and no one will touch them. But you don't buy crude goods so why should you care, right?
Faced with rising raw-material costs, manufacturers are raising prices. Caterpillar Inc., the world's largest maker of earthmoving equipment, said last month that fourth-quarter profit surged 54 percent, helped in part by higher prices. The company raised its earnings forecast for this year and announced a price increase of as much as 5 percent, effective Jan. 1.
...and on down the chain of production they are passed, higher prices. But they would not be sustainable without the artificial expansion of money and credit by the central banks, the Fed in the United States. A price increase here would be offset by a price decrease there; no general rise in prices would be seen.
With all the talk about the Fed focusing in on the fixing of the Fed Funds rate very few people these days keep track of the changes in the money supply. Doug Noland from the Credit Bubble Bulletin gives us the latest Fed data:
Broad money supply (M3) rose $9.3 billion to a record $10.280 Trillion (week of Feb. 6). During the past 38 weeks, M3 has inflated $654 billion, or 9.3% annualized. Over 52 weeks, M3 has expanded 8.2%, with M3-less Money Funds up 8.3%. For the week, Currency added $0.4 billion. Demand & Checkable Deposits fell $26.4 billion. Savings Deposits jumped $24.2 billion, and Small Denominated Deposits increased $2.6 billion. Retail Money Fund deposits slipped $0.6 billion, while Institutional Money Fund deposits rose $11.0 billion. Large Denominated Deposits declined $11.0 billion. Over the past 52 weeks, Large Deposits were up $264 billion, or 23.3% annualized. For the week, Repurchase Agreements jumped $12.6 billion. Eurodollar deposits declined $3.5 billion.
Bank Credit gained $2.8 billion last week (5-wk gain of $103bn) to a record $7.591 Trillion. Over the past 52 weeks, Bank Credit has inflated $676 billion, or 9.8%. For the week, Securities Credit declined $6.1 billion. Loans & Leases were up 12.0% over the past 52 weeks, with Commercial & Industrial (C&I) Loans up 15.3%. For the week, C&I loans declined $3.6 billion, while Real Estate loans expanded $8.9 billion. Real Estate loans have expanded at a 10.9% pace over the past 20 weeks and 14.5% during the past 52 weeks. For the week, Consumer loans were about unchanged, and Securities loans increased $7.6 billion. Other loans declined $4.3 billion.
Total Commercial Paper dropped $14.5 billion last week to $1.675 Trillion. Total CP is up $25.4 billion y-t-d (7wks), while having expanded $241 billion over the past 52 weeks, or 16.8%. Last week, Financial Sector CP borrowings declined $13.5 billion to $1.537 Trillion, with a 52-week gain of $247 billion, or 19.2%. Non-financial CP declined $1.0 billion to $137.7 billion, with a 52-week decline of 4.0%.
Now I ask you, do those annual numbers leave you with the impression that we are living in a restrictive monetary environment?
Take monetary expansion down to zero and let rates go where they will, then we'll call it neutral.
Until then the business cycles will continue.