Commodities prices are surging.
World white sugar prices reached record levels on Aug. 10, largely because of booming demand in India where the government has lifted a ban on imports. Oil prices continue to hover around $70 a barrel, and gold is in the mid-$900 range. Meanwhile the CRB Continuous Commodity Price Index has surged to a level 30% above its March low.
Finally, copper, supposedly a barometer of the global economy, went above $6,000 per metric ton - up more than 96% this year.
And while prices for most commodities are still well below last year’s peaks, the price spike is more dangerous than it looks.
Normally, commodities prices zoom at the top of a global inflationary boom, as in 1973, 1980, or last summer. This time, the surge is happening at the bottom of a recession. If it continues, the commodities price resurgence could cut off global recovery before it really gets going.
Commodities prices usually take off at the top of a normal business cycle, as inflation is accelerating. The price rise then causes commodity consumers to feel poorer. This reduces demand and brings on a recession. Then, new production capacity comes on stream after demand has fallen back, causing prices to remain depressed for several years.
That’s what happened in 1973, with the first Organization of Petroleum Exporting Countries (OPEC) oil price rise, and again in 1980, with the second. After 1980, we didn’t see a real commodities price surge until the middle 2000s. That’s because the tech revolution caused consumer demand to move to things like computer chips that used fewer raw materials than traditional products.
Last summer, we had a similar price peak. Given the depth of the current recession, you’d expect commodities prices to stay low for several years, as new production capacity comes on stream. But that hasn’t happened. Instead, prices have rebounded sharply.
There are three possible reasons for this year’s surge.
First, it could be the result of very low interest rates and loose monetary policy. In that case, it will soon lead to a rise in general inflation.
It could also be due to the worldwide fiscal stimulus - in the United States, China, the United Kingdom, India and most other economies. Much of the stimulus - particularly in China - consists of infrastructure spending. Infrastructure development requires lots of steel, copper, cement and other commodities. If that’s the case, the resulting budget deficits are likely to cause bond market problems.
