NEW YORK (CNN/Money) -
Fed officials have put on their inflation-hawk suits, consumers are digging out their 'Whip Inflation Now' buttons from the '70s and U.S. markets are shuddering at the prospect of higher interest rates.
And yet prices for commodities such as copper, soybeans and cotton, which fueled Wall Street inflation worries at the beginning of the year, have cooled off. Could they be signaling that inflation is going to be milder than many expect, giving the Fed room to be "measured" in raising rates?
Beginning last year, strong demand for raw materials in China, the United States and elsewhere drove commodity prices through the roof, to multi-decade highs in many cases, and helped fuel some of Wall Street's fears that inflation was about to make an unwelcome return.
But since peaking in early April, the Commodity Research Bureau's broad commodities index has fallen 5 percent, while gold futures on the New York Mercantile Exchange have fallen more than 10 percent.
Copper peaked earlier, on March 1, and has since dropped more than 15 percent. Soybean prices are down about 18 percent since peaking in late March. Cotton prices have fallen some 9 percent since their early May top.
Some analysts believe the lower prices are here to stay, saying some of the earlier gains were a little bubblicious, driven by some trader speculation that's since been squashed.
Meanwhile, the U.S. dollar has strengthened and in the process it has driven commodity prices lower by increasing the amount of stuff a dollar can buy. And the Chinese government has apparently succeeded in tapping the brakes on its economy's mammoth growth, cooling global demand somewhat.
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 | | Commodity/index | | Date of peak | | Decline since peak | | CRB index | April 8 | 5% | | Copper | March 1 | 15% | | Gold | April 1 | 10% | | Cotton | May 13 | 9% | | Soybeans | March 22 | 18% |
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"I don't know that we'll see those high prices again for the foreseeable future, and we're into a sideways price trend now," said Frank Lesh, commodities trader at Rand Financial Services in Chicago. "Though prices are higher than in early 2003, they're definitely down to much more manageable levels."
The slowdown showed up in a big way in the Bureau of Labor Statistics' most recent producer price index (PPI), which showed crude materials -- excluding volatile food and energy commodities -- dropped 3.9 percent in April, the biggest decline since December 1974.
The BLS is once again struggling to release the PPI -- and there's still no telling when they'll print the May report -- but Citigroup senior economist Steven Wieting believes the index will show another significant decline in crude goods.
What's more, Wieting and other analysts pointed out, commodity prices are self-correcting; producers rush to make more stuff when they see prices going up, and increased supply pushes prices down, as long as demand is steady or falling.
"Beneath the surface, production and inventory, here and abroad, are moving up faster than the rate of demand growth," Wieting said. As a consequence, he thinks the buildup in commodity prices in 2003 and early this year may just turn out to be a rebound in pricing rather than a lasting surge in inflation."
If true, that would be bad news for the stocks of many basic materials firms. Shares of aluminum maker Alcoa (AA: Research, Estimates), for example, have dropped nearly 19 percent since peaking on March 1, while the Dow Jones Basic Materials Index has fallen some 6.5 percent.
But it could be good news for the profits of companies that use all this stuff, and it could also help make the Federal Reserve more gentle when it comes to raising its target for the fed funds rate, a key overnight lending rate.
Most everybody expects the Fed to raise the fed funds rate by a relatively mild quarter percentage point at the end of this month. But hawkish Fed comments last week drove market speculation that a bigger-than-expected hike could be on the way, sinking stocks on Monday.
Then again, many analysts believe commodity prices are far less important for inflation and corporate profits than labor costs, which seem to be on the rise after a long decline. Cooling copper alone might not be enough to keep the Fed at bay.
What's more, it's possible China might not be able to slow down its super-heated economy all that much, keeping demand for commodities high, and many analysts expect the dollar's decline to reverse itself eventually, which would also push commodity prices back up.
"I think it's still too soon to say this is a sign that fundamental inflationary pressures are cooling off just yet," said Paul Kasriel, director of economic research at Northern Trust. "And I think commodities are due for another leg up -- this has been a correction in a still more fundamental longer-term trend up."
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