It has been touted as a potential saving grace for the Australian and international economies for 2009.
I write of commodity prices.
The argument put forward by many analysts is that the fall in commodity prices over the last six months will help to drive down prices of goods and services in 2009. Remember that the higher commodity price levels from 2003 until 2008 were one of the driving forces behind high inflation numbers.
That must mean the analysis of falling commodity prices equals lower costs to business and therefore lower costs to consumers.
An extension of the argument is that because of these falling costs and falling prices the potential for a deflationary economic environment is now a real possibility. Hence the reason for global central banks to cut interest rates to stave off the ‘dreaded’ deflation.
So, have they got it right?
Well, we don’t know for a fact, but when we hear the mainstream media repeat the theory as gospel, the natural contrarian inside makes us want to look at it in more detail.
Let’s take a look at a selection of commodity prices to start with.
This one is a chart you will be familiar with…
Crude oil has taken a beating since it reached a peak of nearly USD$150 a barrel during the middle of last year. Important as crude oil is, it’s only one commodity.
So let’s have a look at some of the other commodity prices that many policy makers chose to ignore in their inflation calculations.
The price of soybeans has also had a pretty severe fall since mid year, although it hasn’t fallen quite as much as oil.
And what about the sugar price. If there’s one commodity that seems to be present in most packaged foods it’s sugar.
Again, a big price fall.
The fall in these commodity prices shouldn’t be underestimated. It will have an impact on the costs incurred by manufacturers, and it may have an impact on the prices paid by retailers and consumers.
However, that isn’t guaranteed. If we take a look at a broader scale of commodity prices, the RBA Index of Commodity Prices, the picture – for the time being at least – doesn’t look that encouraging.
Although commodity prices have fallen by over 10% in US dollar terms since the middle of last year, the prices in Australian dollars have not.
In fact, during the same period that US dollar prices have fallen, Australian dollar commodity prices have actually risen by around 30%. Thanks of course to the fall in the Aussie dollar.
Even the price of oil which is now trading at USD$42 a barrel is still AUD$60, representing roughly a 60% drop from the peak of around AUD$154 a barrel. That’s compared to a 72% fall in the US dollar price.
Whether you look at these commodity prices in US dollars, Australian dollars or Hungarian Forints, it still makes the argument put forward by politicians and central bankers that inflation is no longer a concern all the more untenable.
The very act of flooding the market with more cash and more credit to ’stimulate’ the economy will do little more than help to prop up commodity prices that could otherwise have fallen even further if markets had been allowed to run their full course without government intervention.
We’ve said it before, inflation is likely to be one of the big stories of 2009.