Friday, March 25, 2011

Deconstructing the San Francisco Fed’s Commodities vs Global Demand Chart.

A very classy bit of journalism from FT Alphaville:
When I first saw the chart my reaction was almost opposite what the FRBSF authors intended.

In addition, rather than thinking about the impact of QE2 my thought was:
"The era of cheap food that began with the concurrent repeal of Britain's Corn Laws and the commercial acceptance of McCormick's reaper has ended."
Perhaps I should post on this remarkable change in a 170 year trend.

From FTA (yes, I know the acronym):
John Kemp dismantles the commodities vs global demand chart
On Thursday we wrote about the San Fran Fed’s commodities vs global demand chart. Just so you don’t have to go back, here it is again:

We were unsure how to reconcile that chart to another, earlier chart provided by John Kemp of Reuters, from which the columnist scrutinised the relationship between QE2 and its impact a number of variables.
Well, Kemp spotted the San Fran Fed’s chart too, and his column this morning includes a devastating critique of the way it was constructed.
We quote liberally:

FedViews presents a graph entitled “Commodity prices track world demand”. It uses a measure of world industrial production from the Netherlands Bureau for Economic Policy Analysis (CPB) and non-energy commodity prices from the Commodity Research Bureau (CRB). 

FedViews concludes “Global commodity prices have followed global economic activity as measured by world industrial production … Commodity price swings have a direct impact on headline inflation … [but] have had only a small effect on underlying inflation”.

Unfortunately, the chart is profoundly misleading. Its use of different scales on the vertical axes and decision to show changes only since 2000 gives a grossly distorted view of co-movements in commodity prices and industrial output.

I have attempted to reproduce the FedViews chart (Chart 1). It is not clear what time series the Fed used for “non-energy commodity prices”. I have used the Thomson Reuters/Jeffries CRB Non-Energy Total Return Index <.TRJCRBNETR>.