Higher commodity prices flash warning signs

(breakingviews.com) -- Commodity prices are flashing a danger signal for the world economy. Generally, price spikes occur at the peak of economic cycles. This time however, a sharp rebound is coinciding with an economic trough.

That could be caused by the recent rapid growth in global money supply, by large infrastructure-heavy fiscal stimulus programs or by the continued upsurge in demand for commodities in India and China. Whatever its cause, further price strength could spark inflation and stall recovery of the global economy.

White sugar prices reached record levels on August 3, while gold traded at close to record levels, oil moved again above $70 per barrel and the CRB Continuous Commodity Index traded within 1% of its June high. The price of copper, generally considered a good barometer of global economic conditions, has almost doubled in 2009, rising above $6,000 per metric tonne.

Such sharp price moves generally occur at inflationary economic peaks, such as those in 1973 or 1980. A price spike near an economic trough is highly unusual. A continued commodities price spike endangers economic growth.

If the cause is monetary, it could bring general inflation. If it is fiscal stimulus, it may well cause indigestion in global bond markets. It may be due to India and China's growing needs, as their citizens' demand is more commodity intensive than that of the rich West.

In that case, it may cause commodities shortages and price spikes to occur while demand in western economies is still far below its full-employment level. Resurgent inflation, swooning bond markets or commodities shortages could all bring incipient economic recovery to a premature end.

For commodity producers such as Brazil, Russia and members of the Organization of Petroleum Exporting Countries, the price surge is good news in the short term. For the global economy, it may spell further trouble ahead.