Commodity inflation

Publication date: 20 August 2012
Author: Michael Derks, FxPro

Not getting the attention it deserves is the recent spike in oil and food prices. Israeli sabre-rattling and a significant tightening in US oil inventories have contributed to a marked jump in the price of oil over the past couple of months – two months ago Brent crude fell below USD 90 a barrel but is now near USD 116, an increase of nearly 30%! The current oil price is roughly USD 13 below the peak set back in early March and 20% above the average of the past three years. For developing countries that rely on imported fuel, such as India and China, this recent price spike renders policy-making even more treacherous, at a time when both foreign and domestic demand have clearly weakened.

To compound the misery in much of the developed world, much higher food prices are headed its way after the worst US drought for many decades. July temperatures in the America were the hottest on record. Food represents a much larger proportion of the consumption basket in developing countries, and so household budgets are stretched very quickly once food prices rise materially. Prices for mandatory foodstuffs such as corn, wheat and soybeans have soared in response to a global shortage for these commodities. The jump in corn prices has re-ignited the debate in the US regarding the use of corn in ethanol production – 40% of the US corn crop is used to make ethanol. According to the United Nation Food and Agriculture Organisation, global good prices were up by a staggering 6% last month.

At a time of weak global demand, with Europe still in a financial vice and with central banks in the advanced world running out of monetary medicine, rising commodity prices adds yet another layer of complexity to the task for policy-makers.