Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Breaking Views

Higher commodity prices flash warning signs

Shortages, inflation, or swooning bond markets - any way you slice it, price spikes could stop economic recovery in its tracks.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Martin Hutchinson, breakingviews.com

(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. To top of page

Company Price Change % Change
Freeport-McMoRan Inc... 10.50 0.31 3.04%
Bank of America Corp... 16.36 -0.08 -0.49%
Apple Inc 113.29 0.37 0.33%
Intel Corp 28.42 0.70 2.53%
Alcoa Inc 9.41 0.55 6.21%
Data as of Aug 28
Index Last Change % Change
Dow 16,643.01 -11.76 -0.07%
Nasdaq 4,828.33 15.62 0.32%
S&P 500 1,988.87 1.21 0.06%
Treasuries 2.19 0.02 0.83%
Data as of 6:38am ET
More Galleries
The stock market's wild week in 6 pictures It was the wildest week in stocks in recent memory. Here's photos and CNNMoney's tweets of reactions to the panicked selling on Monday and Tuesday, which gave way to a mad buying scramble on Wednesday and Thursday. And then...a selloff on Friday again. More
How New Orleans is learning to live with water After Hurricane Katrina, the city of New Orleans had to reinvent the way it manages water and protects itself from future storms. More
Your degree will earn you the most from these colleges Art majors can make big bucks, too. Find out which school has the highest paid grads in your major. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play