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When commodity prices fall

There’s good news for anybody worrying about inflation: Chinese money growth is slowing down. Forthcoming figures from the People’s Bank of China are likely to show that the M1 measure of the money stock has grown less than 4 per cent in the last 12 months, compared with growth of over 14 per cent in the year to January.

This matters because M1 growth has for years been a decent lead indicator of annual changes in commodity prices, as measured by the S&P GSCI. Slowdowns in M1 growth in 2001, 2005, 2008, 2012, 2014 and 2019 all led to falls in commodity prices soon afterwards. There’s a simple reason for this, Monetary growth in China predicts output growth there, so slower money growth leads to slower output growth and hence less demand for commodities. Granted, commodity prices have recently risen by more than their traditional link with M1 would predict, but this could be because a snapback in demand has coincided with low inventories caused by the pandemic.

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