The recent decline in commodity prices has convinced some analysts that the world economy will soon be on the mend: Inflation has been cured, central banks will be able to start cutting rates, corporate profits will improve, and consumers will be able to afford to eat and drive. Not so fast.
The background: Since hitting highs this spring and summer, major commodities have nosedived:
- Oil down 20%+
- Grains down 20%-35%
- Gold off 20%+
And the celebration has begun. WSJ:
- There is an emerging consensus that rising inflation is “gone, it’s over,” at least in Asia, says Tim Condon, an economist at ING in Singapore.
- The recent drop in commodity prices is “an unambiguous positive” for the world, “especially in the developing countries,” says Nancy Birdsall, president of the centre for Global Development, a think tank in Washington.
- In Brazil, where the central bank is raising rates to stem 6.4% inflation, some officials such as Finance Minister Guido Mantega now say the “worst is over” for inflation and are clamoring to reverse the policy.
The price do ease pressure, but the recent drops need to be kept in perspective. Oil is still more expensive than it was in May and more expensive than at any time in history with the exception of the past few months. Rice is nearly twice as expensive as it was last year, and almost all major commodities are up at least 20% since early last year.
Rate cuts also usually take at least six months to take effect, so even if commodity prices erased all of the gains of the past few years, the global economy will take time to respond. And, as the WSJ observes, commodity prices aren’t the only problem, and the news isn’t all good:
- A drop in commodity-led inflation won’t solve financial- and housing-market problems.
- Inflation remains stubbornly high in Vietnam, Singapore, Malaysia and other emerging markets, in some cases reaching the highest levels in a quarter-century.
- Some analysts fear price pressures will continue to lurk even if oil and other commodity prices fall further, as past increases work their way through the system (e.g., Airline surcharges).
What’s more, commodity prices are likely falling as a result of weakening global demand. Falling prices may reduce the rate of that decline, but they aren’t likely to reverse it. So hold the champagne.
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