Fortune: Hot Commodities - Too Late to Buy?

By: TraderMark Saturday, June 14, 2008 2:46 PM

Symbols: BHP, C

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Economists think inflation is here to stay. And it's likely to get worse.

A weak dollar and growing economies in emerging markets have conspired to send commodity prices higher. Those factors are unlikely to change anytime soon.

"We're more open to influences from the rest of the world than we were before," said Jay Bryson, international economist with Wachovia. "That does make it more challenging to keep inflation under control."

What's more, the Federal Reserve is relatively powerless to deal with many of these pressures. "The Fed can't control prices of commodities determined in a global market," said Rich Yamarone, director of economic research at Argus Research. "If it could, it would have done so already."

But it's not just oil and food that are leading to higher prices for consumers. A separate inflation reading reported Thursday showed the price of imports, excluding oil, were up 6.6% in the 12 months ending in May. That's the highest increase in that measure in 20 years. (yes I remember one blogger talking about this. Did CNBC mention it? Probably for 20 seconds, after all retail sales were "better than expected" - have to focus on that)

Rapid growth of manufacturing and services overseas has workers in developing economies such as China and India winning healthy wage increases. That also raises prices of those countries' exports. (long predicted on these virtual "pages" - hence why one day multinationals will be moving out of China and into places they can exploit cheap labor next - Africa, Vietnam, Indonesia - wherever) (Feb 28: China Raising Minimum Wage) & (Feb 21: Rising Factory Costs Erode China's Edge) & (Jan 28: India Facing a Shortage of... Workers?) & (Aug 19: Interesting China Article)

Much of the weakness in the dollar has been laid at the feet of the Fed, which has slashed interest rates seven times since September. At the same time, central banks elsewhere have made only small cuts to their interest rates.

Oil analyst Peter Beutel, president of Cameron Hanover, said he believes 90% of the rise in oil prices since last August was due to the Fed's rate cuts and the expectations of rate hikes in Europe. (if you plot the price of oil explosion its a direct correlation with the Federal reserve cuts, and flooding of liquidity - hmm, all starting in August 07 - what a coincidence - let's blame greedy oil executives instead of looking in the mirror!) "If the dollar was where it was last August, there's a very good chance we might never have seen $100 a barrel oil, maybe not even $90," he said.

And with the unemployment rate registering its biggest spike in 22 years in May, the Fed is not likely to push rates higher soon, economists said.

"I think you'll see the Fed talk up a storm about the caustic nature of inflation, because that's all they can do now, at least until the election is over," said Yamarone. (agree)

"The Fed is painted into a corner," said Barry Ritholtz, CEO and director of equity research for Fusion IQ. "They don't dare raise rates. The credit crisis is not even remotely behind us. So the Fed has limited options and there's only so much they can do." (agree)

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