U.S. Federal Reserve Chairman Ben S. Bernanke ignored the warnings of most
economists last week, and kept the benchmark Federal Funds rate at 2%, far below
the actual rate of inflation.
As a result of this non-move, investors can probably look forward to having
global commodities boom to continue for at least a while longer.
Here’s why.
Genesis of a Commodities Boom
Although the overall commodities boom has been under way for a number of
years, prices didn’t just move up in a straight line: There have been long
stretches during which prices advanced sharply, followed by short stretches of
volatile prices reversals.
The latest advance - and certainly one of the most intense - was ignited
Sept. 18, which is when the U.S. central bank embarked upon one of the most
aggressive rate-cutting campaigns in its history, slashing short-term rates from
5.25% to the current 2.0%. Since the rate cuts began, the Reuters/Jefferies CRB
Index of commodity prices has jumped 32%, from 435 to 572. Oil is up from
$82 to $143 per barrel, a rise of 74%. And gold has moved rather modestly, from
$770 to $928 per ounce, a mere 21%.
The reason for this intense advance in commodity prices is that the Fed and
its European counterpart have been pumping money into their respective economies
to prevent the collapse of several major banks. The St. Louis Fed’s “Money
of Zero Maturity” (the best broad money-supply measure left over since the central bank stopped reporting M3 money-supply statistics in
March 2006), is up at an annual rate of 17.6% during the last six months. In
Europe, Euro M3 is up at an annual rate of 10.8% during the same period - still
double the growth seen in nominal gross domestic product (GDP).
In the key emerging markets, the money supply has been rising even faster -
19% in China over the past year, and 21% in India. Not surprisingly, those
countries’ inflation rates are taking off, with India into double digits and
China quickly getting there.
Igniting Inflation
In the U.S. economy, inflationary pressures are just beginning to show
themselves. Producer price inflation (PPI) was 7.4% over the 12 months to June.
