According to my MP, in a letter to me, there is no hyperinflationary pressure in the global economy. He should know … he’s on David Cameron’s Shadow Treasury team.

Oh dear. Apparently he doesn’t know, because he’s wrong.

Commodity inflation is out of control. Almost all commodity indices were up over 12% in February, and up over 18% since the start of 2008.

Taking a longer term view, wheat futures are 120% above 12 months ago, corn 20%, soybeans 80%, rough rice 55%, and platinum 80%.

The question is, where is the pressure on commodities coming from?

The obvious first point to make is that since most commodities are denominated in US dollars, that the collapse of the value of the dollar clearly has had an impact. However, the dollar is only about 4% lower against Sterling compared to 12 months ago.

Globally, there is nothing to worry about with stocks of crude oil, petrol and natural gas, so the fact that OPEC isn’t doing anything to increase production further to ease price pressures is no surprise.

Metals, on the other hand, have falling stock levels. The same goes for soft agriculturals and grains, which, sadly, have the added pressure of bio-foolery to cope with.

Finally, meat, is directly affected by the price of the grains necessary to grow the livestock.

However, the main pressure on commodity prices is coming from the clear realisation that the global financial system is in an unrecoverable mess. When complex financial instruments are no longer seen as good places for long term investment, and when the collapse of those instruments filters down to traditional paper assets, such as equities, then real physical goods is where the money goes. People seem to be remembering that the economy is physical!

$150 billion has been pumped into commodities markets since the start of the year by fund managers hedging against the (insane) explosive growth in the world’s money supply. The continuing falls in the dollar, along with “difficult” fixed income and equity market conditions, are compounding this effect.

So don’t expect to see commodity inflation go away any time soon. Goldman Sachs predict $200 a barrel oil in the not too distant future. And so, I have a message for David Gauke: pull your head out of your ass. Hyperinflation is here, and its going to hurt like buggery.

This entry was posted on Sunday, March 9th, 2008 at 1:37 am and is filed under Economy, Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.