Don’t move. Don’t eat. We’ll be fine.
Easier said than done, isn’t it?
Recent days have marked yet another stunning run higher in commodity prices — particularly for the sort of stuff that fuels and feeds our lives.
First, crude oil prices surged more than $11 a barrel in a single day, cresting at $138 a barrel. Then, the nationwide average price of regular gasoline moved past $4 a gallon. Finally, the price of corn for July delivery smashed the $7 a bushel barrier for the first time.
We’re starting to feel it now, aren’t we? In our household, every decision to get in the car, every raised fork and every flick of a light switch is becoming increasingly fraught with cost-benefit analysis.
During the first five months of this year, overall consumer inflation has risen at a 4 percent annual rate. But energy prices are racing ahead at a 16.5 percent rate. And food prices are surging at a 6.3 percent rate.
Meanwhile, more signs are emerging that higher prices for commodities are beginning to filter a bit more broadly through the economy. In late May, Dow Chemical, the nation’s largest chemical manufacturer, announced price increases of up to 20 percent for many of its products, citing soaring energy prices.
By now, we’re all familiar with the fundamental factors driving the commodity spike through corporate and household budgets.
Most simply, more folks in emerging economies across the globe want to move and eat in ways we’ve long since taken for granted, driving up demand for commodities. Meanwhile, supplies have become less certain, whether it’s because of geopolitical instability and environmental concerns when it comes to energy or the simple fact that rains have flooded a broad swath of the Corn Belt in recent weeks.
Plenty of theorists also argue that we’re merely witnessing the latest in a series of financial bubbles driven by hot-money speculators in search of the next quick score. Recent price charts for crude oil and corn certainly bear an almost eerie resemblance to the parabolic late-cycle surges we saw in tech and telecom stocks and some housing markets before those bubbles burst over the past decade.
Until recently, Federal Reserve officials generally have remained more focused on economic weakness than inflation, clinging to the notion that core inflation — which conveniently excludes the price of food and energy — had increased relatively modestly and those expectations of future inflation remain “anchored.”
That analysis clearly is under review among policymakers.
“The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation,” Federal Reserve Chairman Ben Bernanke said in a speech last week.
The message in the Fed’s evolving rhetoric is that the recent series of interest rate cuts is probably over, even if economic growth continues to slow. Although the Fed almost certainly won’t raise short-term interest rates when it meets again next week, the next move increasingly is expected to be higher.
Even if slightly higher interest rates make the short-term economic pain a little worse, I think that’s the poison to pick. As someone old enough to remember the damaging combination of high inflation and economic stagnation of the 1970s, I believe the inflation dragon must be slain before it catches fire.
As you’ve probably gathered by now, I’m giving a lot more weight to the fundamental argument than the speculation argument when it comes to the commodity price discussion these days.
Put simply, I don’t think the recent commodity spike is just a passing phase. I’ve actually caught myself uttering the worrisome words “it’s different this time” during recent discussions comparing the tech and housing scenarios with energy and grains.
Frankly, I hope I’m wrong. But I fear I’m not. We’ll find out soon enough — perhaps before we kick on the furnace this winter.
Brrr.
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