Tuesday, December 18, 2007

Commodity Price Boom Alive And Well

In my previous post, where I argued against Nouriel Roubini's views on monetary policy, I pointed out that his belief that commodity prices would fall and so lower consumer price inflation is wrong for several reasons.

First because we are in a structural commodity price boom, as Jim Rogers pointed out in his book Hot Commodities which I reviewed here. Second, there are reasons to believe that the U.S. crisis won't spread as much as Roubini thinks. And third, while some highly cyclical commodities may fall, there are many noncyclical commodities which will continue to rise.

The most cyclical commodities are of course industrial metals, such as nickel, zink and copper. They have in fact already started to fall, even in U.S. dollar terms and even more so in terms of other currencies.

However, some commodities are not cyclical. This includes gold, but also agricultural commodities, such as wheat, corn and coffee.

And these noncyclical commodities have continued to rise in value. The Economist's commodity price index is up 1.2% in the latest month and 15.6% in the latest year. If you disaggregate this number you see some interesting details. While industrial metals is down 9.4% in the latest month and 12% in the latest year, food commodities is up 8.8% in the latest month and 38.8% in the latest year.

Now we see wheat reaching an all time high of $10 per bushel(a bushel is 35 liter) while soybeans and corn also reached new highs. So, the U.S. recession will not end the commodity price boom nor solve the problem of inflation. Instead, we're facing stagflation, a concept which may be difficult to accept for Keynesians like Roubini but is nevertheless very real.


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