Commodities Can't Measure Inflation

The 19th of October will be etched in traders' memories forever for two reasons. The first is the Crash of 1987; the second is an unusually lively -- what the diplomats might call "frank and useful" -- Columnist Conversation exchange on that date last week.

The question before the house is whether commodities are a good measure of inflation. At first blush, this might seem to be a riddle on the order of "Who is buried in Grant's Tomb?," but the answer is rather surprising.

The Long View

Let's take some very long histories of various cash commodities and deflate them by the producer price index, which I've presented in the chart below. I've used monthly averages of the cash market prices both to avoid single-day outliers and the contract roll problems associated with futures markets. All data presented in the chart below go back to 1946 except for coal (1984), aluminum (1951) and natural gas (1976). You may wish to keep in mind that the world's population has more than tripled since 1946. ...