Commodities have been on a tear lately, and many point to it as a sign of Fed-induced inflation, thanks to a new round of quantitative easing.
Yet responding to such a claim from James Hamilton at Econbrowser, The Economist’s Free Exchange blog counters that the recent commodities rally actually seems to have been sparked by China, not the U.S.:
But what’s interesting about his charts is that the steady upward trend common to all of them starts around the beginning of Julyâ€”not the beginning of September, as we’d expect if QE2 were the causal factor. What happened around the first of July? Well, China’s government, which had grown concerned about the too-rapid slowdown in its economy, paused or reversed some of the steps it had taken to dampen activity. This included restrictions on bank lending and a temporary halt to appreciation of the yuan. And what followed, we now know, was a remarkable resumption in Chinese industrial activity. To me, the steady climb in commodity prices over the past four months seems indicative of the surprisingly strong performance of emerging economies.
That doesn’t mean that Fed activity has had or will have no effect. I’d be surprised if commodity prices didn’t go on rising. But much of that rise will be an unavoidable knock-on effect from the collision of soaring global demand for commodities with lagging global supply.
Thus commodities strength might actually a be a good sign — of robust global growth expectations — rather than simply an inflation warning.