Corn and Gasoline Point to Top in Interest Rates

Friday, 23 Aug 2013 07:40 AM

By Michael Carr

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Central banks around the world now seem to believe inflation is good and official policies are in place trying to push prices up. Unfortunately, inflation is determined in the markets, and commodity prices show that the central bankers may not be very successful.

Grain prices have collapsed in the past year. In part, this is due to good weather conditions that have provided farmers with large crops. Corn is down almost 35 percent compared with the price in August 2012. Wheat is also down 30 percent and soybeans have dropped by almost 20 percent.

Other commodities, like sugar and coffee, also show 30 percent drops in the past year.

Oil and gasoline have defied the trend, with gains of 5 to 10 percent. Both markets appear to be setting up tops on their long-term charts and they could both be in the early stages of bear markets.

With commodities moving down, inflation should also drop, and that should put downward pressure on interest rates.

The Consumer Price Index (CPI) indicates that inflation is about 2 percent. There are problems with the CPI, but there are problems with any measure of inflation. Commodity prices indicate that prices of raw materials are headed down and small price increases that consumers have almost come to expect will continue to be the only source of inflation.

With inflation at 2 percent and relatively steady, the yield on the 10-year Treasury should remain below 3 percent and mortgages would also remain low. This provides a source of at least some economic growth and until commodities move up, there is every reason to look for a continued expansion of the economy.

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