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Commodities can still shock

Stephanie Flanders | 19:28 UK time, Thursday, 13 January 2011

The global economy may have come a long way, but in large parts of the world, the past few weeks are a reminder that ordinary life still revolves around a handful of basic goods. And rising food prices can still all too easily bring a government to its knees.

Just ask the Indian prime minister, who recently authorised emergency onion imports from Pakistan - after the domestic price of an onion trebled, in just one month. According to the FT, at least two Indian governments have been felled by the rising price of onions in the past.

We also have the government of South Korea releasing emergency supplies of cabbage, pork and mackerel, among other things, to keep control of rising inflation. And the Indonesian president launching a national campaign to encourage people to grow their own chillies. As I discovered from taking part in a special segment on the GMT programme this afternoon, in Indonesia, chillies are a very, very big deal. And their price has quintupled in barely a year.

Depending on how you measure it, commodity prices are now close to where they were in 2008, when food riots broke out around the developing world, and rising inflation in the UK and other big Western economies made it more difficult to cut interest rates in the lead up to the financial crisis in the autumn (see the chart below).

Headline food prices

Many hope that this time it's different, because only part of the rise in prices is due to rising demand. The rest is due to (hopefully) temporary hits to supply, from crop failures and other shocks. Commodity prices have also been inflated by the fall in the value of the dollar.

In its latest edition of Global Economic Prospects, the World Bank shows that the domestic currency price of food, in many countries, has not risen nearly as fast as the dollar indices suggest (see chart below). Not that this is likely to be much comfort to anyone struggling to make a decent bhaji in downtown Mumbai.

Chart showing food prices will remain well below 2008 peaks

Even if it is temporary, food inflation is clearly making an awkward situation worse in countries like China and India, which were already struggling to keep a lid on prices.

We shouldn't forget there is an important benefit to higher food prices: by raising rural incomes, they can actually help to lower the gap between urban and rural incomes. That is especially helpful in China. But the authorities there are rightly terrified of letting prices get out of control. Controlling inflation, in 2011, is priority number one.

But when it comes to oil, steel and other basic materials, the likes of India and China can at least comfort themselves that rising prices come partly from their own economic success. It is their growth is pushing up demand for these goods, even as the major economies struggle to put their recessions behind them. That had not happened very often in the past. With the notable exception of the oil crises of the 1970s, where rich country demand has gone, commodity prices have tended to follow.

Not for the last time, consumers and policy makers in the West are learning that when it comes to the global economy, they no longer call all the shots. There is also that lurking worry, that ultra loose monetary policy in the US, Britain and eurozone might be having a greater effect on prices and activity in the emerging world than it is having here.

Comments

Page 1 of 3

  • Comment number 1.

    Stephanie,
    Do you not perhaps think that food commodities are so high for two reasons:

    1) World population continues to grow relentlessly and our ability to exploit soil and water resources is limited and perhaps unable to keep up with this growth.

    2) The huge cheap oil fields of the past half a century are past their peak output and thus will inevitably decline in production. The new finds we are making do not make up for the gap in these ex-gushers and are also more expensive to extract (2-3 miles under water in the case of Brazil).

    The above two facts are unavoidable if one chooses to apply logic and analyse the data available.

    I put it to you that we are at a new juncture for our civilisation and we have some tough changes to make. The first of which must be that we have to learn to live without growth and that means curbing population and consumption.

  • Comment number 2.

    I can well understand stronger economies such as China's and India's being fearful of inflation, but it's a little more complex for western countries like the US and UK who currently run massive national debts. Nasty as inflation is, it does have one 'benefit'...it effectively reduces debt.

    But I'm sure the UK - in consistently overshooting its inflation target whilst resolutely refusing to raise interest rates (despite some pretty good evidence that higher interest rates should now be considered a very real option for the good of our economy) - is not playing the inflation game to aid debt reduction. No, surely not.

  • Comment number 3.

    " domestic currency price [...] has not risen nearly as fast as the dollar indices suggest [...] Not that this is likely to be much comfort to anyone struggling to make a decent bhaji in downtown Mumbai. "

    Am I missing something? Do the people in downtown Mumbai actually pay for their bhajis in US dollars? I would have thought that the important measure is the domestic currency price, anything else is probably due to a decline in the US dollar rather than an increase in the price of onions..

  • Comment number 4.

    It seems likely that the rise in commodity prices will lead to a significant increase the rate of inflation in western economies like the UK. Raising UK interest rates, that favoured response of the Bank of England to a rise in inflation will be largely ineffective.

  • Comment number 5.

    Stephanie, Do you stop to seriously consider what you are saying in your statement:
    "We shouldn't forget there is an important benefit to higher food prices: by raising rural incomes, they can actually help to lower the gap between urban and rural incomes. That is especially helpful in China. But the authorities there are rightly terrified of letting prices get out of control. Controlling inflation, in 2011, is priority number one."
    This statement smacks of the same detachment one hears from people in the strategic studies field, when they talk about 'acceptable levels of collateral loss' or similar measures. These are people you are talking about, not just numbers.
    You acknowledge the Chinese authorities are making the control of inflation a number one priority. But the reason is not simply to keep within government guidelines with the burden of a letter having to go from the Governor of the central bank to the Chancellor if the boundaries are breached. The reason is to stop rioting on a grand scale by people who are not simply worried about the quality of their "bhaji" (in India) or their "rice cakes" in China but are trully trying to stave off possible starvation and at best serious malnutrition.
    Please remember that a large percentage of the Chinese population is still in the rural areas, where life is still tough. These people are not part of China's economic miracle and the idea that income variance might narrow as they look at rising food prices will I suspect provide most of them with little comfort.

  • Comment number 6.

    What's a "twop Indian government" when it's at home?

  • Comment number 7.

    "the past few weeks are a reminde that ordinary life"

    is your spell check broken?

  • Comment number 8.

    Is it "chillies" (noun) or "Chillies" proper noun?

  • Comment number 9.

    "shocks.Commodity" - there's usually a space after a full stop

    "It is their growth is pushing up demand for these goods" Shouldn't that read

    "It is their growth which is pushing up demand for these goods"?

    That's 5 grammatical errors I've spotted. Have I missed any others?

  • Comment number 10.

    Another interesting blog Stephanie. Just one point, did you proof read it at all? Normally I wouldn't be bothered but there are loads of typos in the first two paragraphs :)

  • Comment number 11.

    5. At 9:35pm on 13 Jan 2011, Straightalk wrote:

    Stephanie, Do you stop to seriously consider what you are saying in your statement:
    "We shouldn't forget there is an important benefit to higher food prices: by raising rural incomes, they can actually help to lower the gap between urban and rural incomes. That is especially helpful in China. But the authorities there are rightly terrified of letting prices get out of control. Controlling inflation, in 2011, is priority number one."
    This statement smacks of the same detachment one hears from people in the strategic studies field, when they talk about 'acceptable levels of collateral loss' or similar measures. These are people you are talking about, not just numbers.
    xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

    Indeed Straightalk.

    I would also add that Flanders little quip:

    "in large parts of the world, the past few weeks are a reminde(sic-Do you send your blogs for proof-reading Steph?) that ordinary life still revolves around a handful of basic goods"

    rather ignores the fact that a very large percentage of the UK population also subsists on just a few(?) "realtively cheap" food staples.

    There` nothing like living in London when you`re a super-annuated beeboid eh?

  • Comment number 12.

    6. At 10:04pm on 13 Jan 2011, ltfcunited wrote:
    What's a "twop Indian government" when it's at home?

    Complain about this comment

    7. At 10:06pm on 13 Jan 2011, ltfcunited wrote:
    "the past few weeks are a reminde that ordinary life"

    is your spell check broken?

    Complain about this comment

    8. At 10:07pm on 13 Jan 2011, ltfcunited wrote:
    Is it "chillies" (noun) or "Chillies" proper noun?

    Complain about this comment

    9. At 10:13pm on 13 Jan 2011, ltfcunited wrote:
    This comment is awaiting moderation. Explain.
    ---------------------------------------------------
    A combination of phat phinger and the Beeb having problems with the Blog sites, I suggest.

  • Comment number 13.

    Food inflation is making a bad situation worse in more places than China and India .
    To believe that rising food prices will enrich the rural poor is simply simplistic . The only ones enriched by this are the factory farmers and marketeers . The individual farmers still have to feed themselves and provide for the next year , quite often they do not have a market influencing surplus . It is the large scale projects where the money is made and not for the labourers ( after all there are plenty of them willing to work for a pittance ) but the organisation .

  • Comment number 14.

    Well, it looks as though we are in a straight re-run of 1979/80 and 2008. We live in interesting times.

    I suspect that the UK Benefits bill is going to rocket rather than hang fire or reduce slightly as the Coalition had hoped.

    There is only one solution: tax off petrol & diesel and onto income in a 60% tax band. A small reduction every month for two years. Fuel duty will commence a permanent decline in two years time anyway. Better to wean our Governments off it now, rather than face a sudden crunch 5 to 7 years hence.

    The pressure on GO for the February/March Budget grows by the day.

  • Comment number 15.

    To those who wrote in response to my posts on the previous topic, many thanks. I have just posted a reply at the end of the series

  • Comment number 16.

    1. At 8:18pm on 13 Jan 2011, Sage_of_Cromerarrh

    You have it spot on. No politician will talk about the 2 ton gorilla in the room, the world is over populated and it is set to get much worse. The rise in living standards of the developing economies will also contribute to rising demand. It is a simple supply and demand issue. Most of our energy resources are finite and most of the worlds production of food relies on oil. Things will have to change or a lot of people will be hungry.

  • Comment number 17.

    Stephanie - the last sentence of your piece tells the truest story...

    "There is also that lurking worry, that ultra loose monetary policy in the US, Britain and Eurozone might be having a greater effect on prices and activity in the emerging world than it is having here"

    It is all about the price of money in the developed World - as the price is nugatory so it is any wonder commodity prices have risen so sharply!

    I've been banging on about this for ages - this is just one example of the unintended(?) consequences of the idiocy of the Fools of Threadneedle Street and the Destroyers of C Street. Until Ben and Merve get the marching orders matters will only get more turbulent!

  • Comment number 18.

    Commodities in general are overpriced due to the derivatives that are booming on the back of QE monies on both sides of the Atlantic.

    It is all down to speculation. Hardly any real supply problems, that is all a smokescreen of spin.

  • Comment number 19.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 20.

    Sorry Stephanie but this isn't a shock. It is merely the next stage of the financial meltdown.

    Since 2008/9, the world has been living on the back of a major commodity casino style market. Prices are not rocketing due to production shortfalls (they are merely the propoganda). The price rises are a direct result of financial greed. When other outlets collapsed in 2008, the 'brightest and the best' turned their attention on the commodity markets as yet another no-lose solution. Where do you really believe the incredible results of the investment banks came from? It certainly didn't come from direct business investment.

    In the last thread people were speculating upon the likely triggers for the next major crisis. I believe that you are looking at it.

    Commodity markets were developed so as to smooth the flow of commodities from producer to processor/supplier and constrain prices. Now can we honestly say that they now operate in this way?

  • Comment number 21.

    This is something that has been developing for some time now. Commodity prices have been rising for quite a while and are leading to inflationary pressure around the world. In the vanguard of those alerting us to the danger has been notayesmanseconomics blog.
    "If we look at the world situation we can see that there are inflationary pressures on the global scene. For example the Commodity Research Bureau Spot Index rose yesterday by 3.79 to 536.32. The acceleration in this came in early/mid July 2010 where it was around 420. So since then by this measure commodity prices have risen by 27%.
    The price of oil has been rising too and has risen by 27% since the end of September 2010 using West Texas Intermediate as a benchmark ( although the UK benchmark of Brent crude has risen faster and further….)."

    He thinks that there are real dangers to inflation around the world from this and includes the UK in this. We of course already have issues with inflation.

    http://notayesmanseconomics.wordpress.com

  • Comment number 22.

    SF I am a fan, and I want you to be the number economics writer of 2011, but this food issue was flagged up last year. Are you a reporter or a journalist? You only seem to post a report after the event. Shouldn’t a journalist pre-empt events. Scoops and so forth.

    I appreciate your position.

    Darling was lambasted for saying this is the worse crisis for 60 years. ‘You can’t say that, you’re the Chancellor, you can’t possibly tell the truth. Think of the ratings agencies.’

    SF – “Temporary hit to supply?” Don’t add the weather guess work to your economic pseudo-science; it will make an ass of you and, well that’s about it really.

    It seems to me that no one can predict floods, earthquakes, volcanic eruptions or an economic Armageddon so who can predict supply? Food was the issue 8 months ago. Welcome to the party

    I do understand that politicians and journalists can not go around being doom mongers. This is one of the fundamental problems with what the elected think is a democracy. They think they’ve been elected so we, the little people, don’t need to think. Don’t tell the proles (thank you toldyouitwould) they can’t deal with such enormities. Instead of taking it upon themselves to shield us from the potential impending doom they should tell the, now, educated little people, what may happen so we can start preparing for it and telling our friends and those who will listen. Buy water, tinned fish and long life noodles (and if you like it corned beef).

    But, oh no, they can’t tell us because we my begin to think that the Government aren’t in control. The ratings agencies may get a touch jumpy.

    As for the ratings agencies they will say “this country is golden” when quite clearly they are not as x is about to happen. “No no, golden” they say. Then x happens and now it’s AAA-. We say “x was obviously inevitable why didn’t you see this coming?”

    Things are going to get pricey my friends. Food doesn’t have VAT attached to it. Good stuff, but unfortunately the delivery of said food does. My feeling is 11% inflation by late summer, if the FoTS (see JfH) don’t get their act together.

  • Comment number 23.

    Stephanie back on the first of October 2010 you told us this.
    "it is hard to identify a single indicator suggesting inflation is about to pick up."
    Now you show us a chart showing that at that date food prices had been rising strongly for quite some time if we go back to then....

  • Comment number 24.

    14. At 10:39pm on 13 Jan 2011, Up2snuff wrote:
    "...The pressure on GO for the February/March Budget grows by the day."
    -----------------------------------
    This would admit total financial policy failure, and so must be highly unlikely - sorry, but at the moment its wishful thinking, IMHO. Flying PIIGS? Now there would be a sight. If they crashed and burnt, there would be an excuse, oops sorry, reason....

    I can hear it now from the dispatch box:
    "We supported Ireland, sorry cannot afford to do more, but we've proved our european credentials!"

  • Comment number 25.

    20. At 00:04am on 14 Jan 2011, foredeckdave wrote:
    =======================
    Just read this post and it seems very pertinent to me - thanks. It does sway me to the view that there is a collapse coming; I don't want it to happen, but your suggestion does renforce the argument that it will,

    Would I be correct in assuming that QE has supplied, at least indirectly, some/all of the speculators money for this?

  • Comment number 26.

    As there has been some remarkably adverse weather experienced around the world and demand has not dropped, it should come as no suprise that commodities bump upwards. There just might be a shortage for the short to medium term and this will drive prices upwards. There may be an element of greed but what's new with these market players. The rest of the world just may be able to afford to consume more as opposed to the fat kittens. I, too, am impressed with your final paragraph! Perhaps a market imposed diet might catch on?
    However, I have yet to be convinced that the rurals will benefit at the expense of the urbans. Perhaps, at 59, I'm not old enough? No selling farmland tangents, please. It no longer a commodity!

  • Comment number 27.

    Dear BBC blog contributor,

    Thank you for contributing to a BBC blog. Unfortunately we've had to remove your comment below.

    Evening Stephanie,
    thank you for at last producing a blog which affects us all and not just economists.
    The situation within the commodities futures markets should be ringing alarm bells around the world. The basic cause for these price rises is NOT commodity shortage but speculation, greed and Government monetary policies.
    Because investors (gamblers) cannot get a decent (greater than inflation) return on their savings, money is being poured into commodities futures.
    This is Government policy of low base rates and huge liquidity.

    For example, there is NO shortage of wheat because millions of tonnes are stored for emergency use (like crop failures). However, every story of a natural disaster, or cold, or fires, or flooding is an excuse to bump up the price. The same for oil, there is NO shortage, indeed every supertanker around the world is full and being asked to move at ultra-slow pace because there is nowhere to unload it, and prices may have risen by March.
    Of course our Government wants its cut of the higher price in extra duty and VAT so will do nothing to help us ride out this storm.

    As to your second point about greater return for rural communities, that is a MYTH. Commodities are usually bought on forward order, so this years crops have alredy been sold at last years prices so the farmer doesn't benefit.
    The consumer doesn't benefit either so ask yourself the question, who ultimately benefits from higher commodity prices this year?
    The same logic applies to our energy bills. When the wholesale price of gas or electricity goes up, the retail price goes up immediately. When the wholesale price falls, the retail companies do not reduce their prices, or maybe by a fraction of the fall and six months later.
    Again, this is Government policy and the regulator Offgen is useless as they state that they do not wish to interfere in commercial pricing operations.
    The energy policy of the EU and the UK needs to be looked at again. We have known for many years that the EU agricultural policy is flawed but nothing meaningful has been done to revise it.

    Of course, because of vested interests of Governments, Banks, Universities and Politicians, nothing will be done. You are all on your own and you will have to reasses you energy usage (petrol, diesel,Gas, electricity) and cut it, also reasses your food budget and start making more foods from scratch and do without many convenience foods.

    2011 will certainly be the year of austerity but not quite as the Government had planned it.
    The next scandal for your blog will be water provision and pricing 'cause that's what is going to hit us next.

  • Comment number 28.

    Regarding comment 2:
    Why do people think that inflation reduces debt? Surely it depends on the type of debt and the type of inflation.
    If somebody is earning £25000 per year in the UK, and also has debts of say £20000, why would you think price rises of 5% help reduce the debt? I would have thought it would make it harder to pay down this debt, not easier.
    Is your assumption that everyone gets a nice inflation compensating pay rise each year?
    The best way for the country to protect itself against rising costs is to grow through making things that other people need more competatively than other people can. Then, in general, they might expect to get a compensating pay rise.
    For years I have been reading how uncompetative the Germans were (2000-2006). Structural unemployment, high taxes. Some Economists even questioned whether their car industry could survive foreign competition. Well, it seems to me the Germans have done not bad over the longer term with respect to competing in this world. They have an industrial policy and a skill at reaching agreement between management and workers as to the right future strategy for their businesses. Ultimately, their strength is maintaining high skills and ensuring their products are constantly revised and developed in the right direction. And all this while paying for reunification. For me, this is very impressive.
    I suspect they will be able to buy food and still manage to make great products irrespective of how the price of food and commodities fluctuate over the coming years.
    In the UK, the trade off between relaxed money policy and resulting inflation (higher prices, and so called reduced debt) is fine for the short term (i.e. to take the sting out of a sudden shock). But averaging out peaks and troughs is not a longterm solution - we can after all have an average relative decline in prosperity.
    Of course, that is not to say that monetary policy is irrelevant. It should provide a stable environment for business. And if done wrongly, can ruin a country.
    But I think the long term solution is to make things or services that are in demand (globally), without depending on devalution to increase competativeness. In that way, our society will become stronger and we can absorb future price increases of global commodities.



  • Comment number 29.

    The chart was very informative, and I hope you'll give us more of them in the future. Do we have any real insight into the causes of the 2008 spike?

  • Comment number 30.

    #25 SleepyDoormouse,

    Hi Sleepy,

    I don't have enough information or the skill to define the correlation between QE and commodity inflation. However, when you raise the level of liquidity within the financial markets at a time when real industrial investment is either stagnant or in decline then that liquidity will seek a new home. Add to that ultra-low interest rates around the world then the pressure is on to find an 'acceptable' rate of return.

    Given that we do not appear to have had any more than the usual number of hiccups (weather related) to the production side of the supply chain and the fact that global growth is at best stunted, then the only true rise in commodity prices has to be speculative. Have you heared OPEQ deamding a rise in the price of a barrel of oil? The gas producers heralded that reserves were nearly double what they thought a few months ago. Who is actually using more metal? - remeber Chinese production has not risen significantly. Why is India short of onions?

    This time, I believe, it is clear that the price inflation in commodities can clearly be traced back to the actions and interests of the fiancial sector. If it were not so then there would be clear signs of frustrated consumer demand pull.

  • Comment number 31.

    sage at 1. world wars sought out the problems you mention history will repeat itself just the big question of when.

  • Comment number 32.

    31. Metallic... this is unfortunately the consequence that will arise if mankind can not learn quickly to apply logic , reason, vision, and common sense to ourpolicy making. We have the cognitive capacity but are failing to use it. We have not learned from past experiences and trained our youth and societies to use our full mental capacities and master our basic inherited short term survival emotions.

    Over population and over exploitation of resources is a no-brainer bad choice if one just stops and thinks through the outcomes.

  • Comment number 33.


    Sorry, but it beggars belief that anyone could think that price inflation will not pick up: the only question is, "by how much and for how long?"

    The fact, however, is that price inflation does not mean automatically be our debts will be reduced. The ability to pay off our debts (denominated in £) will depend on income (ie tax revenues denominated in £) - and these do not rise with price inflation.

    Tax revenues will only rise significantly if there is also wage inflation: resulting in increasing income tax - and, because people are able to spend more in nominal terms, VAT.

    The current strategy to allow price inflation but to prevent income inflation will not work. People's income, and ability to spend, decline in real terms: and so wil Government income as the debt declines in real terms.

    On the other hand, the Governmen can't afford to let wage inflation out of the bottle - or confidence in this recover is likely to evaporate. You can feel sorry that they are between a rock and a hard place - but you can't think that, in price inflation, they have a solution.

  • Comment number 34.

    7. At 10:06pm on 13 Jan 2011, ltfcunited wrote:
    "the past few weeks are a reminde that ordinary life"
    is your spell check broken?

    The writer of this column, practically every BBC journalist and many of those responding need more than spell-checkers.

    They need elementary lessons in English grammar.

    It is quite clear that the education system in the UK has failed them completely.

  • Comment number 35.

    Stephanie....
    as an economist do you not believe that recent calls by some commentators for a rise in interest rates to combat inflation are premature. Rises in the retail prices index which are due to higher commodity energy prices and a weaker sterling are not in themselves inflationary. Yes they appear as an increase in inflation but that is a price shock. Increasing interest rates will not bring down those prices and the increases themselves will dampen demand. If interest rates rise then so will mortgage bills which will further add to the apparent inflation. Then the danger is that wages demands increase and we can end up in the inflationary spiral we saw in the 70's and 80's. I think keeping rates low is more important for growth and not tipping us into recession. Let the higher prices reduce demand for fuel and imported foods - that in itself is a good thing and not inflationary if accepted as a price adjustment.

  • Comment number 36.

    greatBobFrance

    As far as I know typing is not taught in the UK education system. Your judgement and conclusions are based on flawed logic. It is quite clear what Stephanie means and there is nothing wrong with the grammar - the r missing from the end of the word is a simple typing error. Stop knocking the UK - its time we started standing up for our country which is something I am very proud of.

  • Comment number 37.

    Years before Lehmann collapsed. there were economists warning low inflation over long period is abnormal and unhealthy in global economy. Well, they were ignored and people enjoyed the spending.

    As for commodities price rise, this is predicted by Jim Roger and he even wrote a book well before that.

  • Comment number 38.

    Charles #35

    Absolutely!

    And if this is a price shock, then how can this apparent inflation erode the debt?

  • Comment number 39.

    "rising inflation made it more difficult to cut interest rates in the lead up to the autumn financial crisis". Thank heaven! Cutting rates might have delayed the crisis, but when it came,it would probably have been even worse than it was.

  • Comment number 40.

    Straightalk @5
    stopsupportingcriminals @11

    Thanks to both of you for your excellent contributions.

  • Comment number 41.

    Four out of the five mistakes, apart from this one

    "It is their growth is pushing up demand for these goods, even as the major economies struggle to put their recessions behind them."

    It could be either:

    "It is their growth which is pushing up demand for these goods"

    or

    "Their growth is pushing up demand for these goods"

    or

    "It is their growth pushing up demand for these goods"

    For those that don't know, Ms Flanders went to a very select girls school, Oxford then Harvard. So that's not really representative of the UK education system.


  • Comment number 42.

    Sage_of_Cromerarrh @ #1

    Absolutely spot on. I've been saying this (to anyone who will listen) for years.

    Some on here may complain about speculators sending up the price of commodities (which may be true short term) but, in truth, there simply isn't enough to go round (long term). Potentially within a generation.

    With the predicted rise in human population just about everything will either be in short supply or will have run out - and all sooner rather than later. The Indian populus will have more to worry about than just onions!

    The rising levels of human population must be addressed by this generation or our great gradchildren are going to have a pretty miserable existence.

  • Comment number 43.

    If its not famine or similarly agriculturally debilitating natural disasters, food price rises could be due to cost push inflation originating from the energy sector. After all nobody will one be caught behind a surge in his costs of living. It is in his best interest as a producer to raise prices of his current production to meet expected rises in his future production costs. Gaming/speculating for maximum profit is not the prerogative only of subsidised ‘Wall Street’ banking firms.

    In the emerging economies, there would be more efficient use of marginal land or opening more arable land for farming. Since this take time, their governments must manage their populations to ‘wait’ patiently for the upcoming bountiful harvest.

    In the well-developed economies: who cares what happens there; most likely their system of agricultural subsidies will just look stupid.

  • Comment number 44.

    Commodities trading in food stuff should be more closely regulated. Movement over over 2% in a week or 7% in month vshould trigger a circuit breaker to allow traders to assess why the price is increasing and prevent speculators from manipulating the prices. Traders and speculators are using commodities for profiteering as returns of less than 7% from stocks and shares are insufficient for their investors.

  • Comment number 45.

    Still behind the curve Steph, this was all predicted 3 years ago.

    Currency wars, trade wars, commodity wars, population growth, climate change…all pointing to the inevitable.

    Don’t expect politicians or economists to understand though (only scientists and engineers understand the exponential function apparently.)

    I doubt we will do anything till it's too late, thus, the four horsemen of the apocalypse are saddling up.

  • Comment number 46.

    Seems to me that here is the explanation why banks aren't lending all this money the government supplied them with. They're off to put it on food stuffs and raw materials in the hope that it will make a bigger profit there and so create the next bubble. Never mind bank taxes, why aren't they charged gambling taxes like any bookie?

  • Comment number 47.

    Let them eat cake!

  • Comment number 48.

    #42 Gilthead,

    How long term do you want to go? Even then, you are considering commodity supply in the terms of what currently appears to exist. If you wish to consider food then we are very far off any scarcity scenario. The amount of marginal land, under-utilised land and the possibility of increasing yield dramatically that exists makes your contention dubious.

    If you wish to base your argument upon oil and gas then you also have to consider the moves that are already underway to diversify the means of power generation. Sustainable development is in its early stages as yet.

    When the supply chain is hijacked the effects will not be merely short term - just look at the growth of supermarkets and their effects upon the chain.

  • Comment number 49.

    There is also that lurking worry, that ultra loose monetary policy in the US, Britain and eurozone might be having a greater effect on prices and activity in the emerging world than it is having here.

    Could you please write a Blog on this please?

    Brian

  • Comment number 50.

    #40- BeyondOurKen
    You are most gracious and welcome.

  • Comment number 51.

    No.18 Kit Green.... spot on. The only real growth in finance has been speculation on commodities, remember, no-one likes a monopoly until they own one. With little or no return elsewhere commodity funds and ETFs are growing like a well oiled boil on the buttocks of humanity. Admittedly this is not really an Indian Onion thing (which no doubt is more localised) but the traditional 'commodities' of which 'food' is now a part... I always saw it more as an 'essential'. Yes the global population is growing but there is still more than enough capacity to provide for all and it is more the financial markets which drive such inflation and let us not forget agricultural policy where vast tracks of land are left fallow (by payment to farmers). Food prices will continue to rise until speculation is taken out of the 'commodity' market... time for a change because it ain't working...

  • Comment number 52.

    # Brian_Moore
    Brian, I think this is more than a lurking worry amonsgt some economists and observers.
    The relatively low level of lending exhibited by the major banks in the US and UK to small businesses for example is an issue of 'Risk Management'.
    If you are sitting at a bank with £100Million to put to work in the current economic climate, why would you put much of this into small businesses? They are infamous for their rates of failure, even though a few do go on to grow into successful entities. Far easier to either drop around to your local government debt auctions (Treasuries, Gilts) and get a secure return. Even better, you can borrow the £100 million from your central bank at very attractive rates. With these sums of money, pretty soon you are making a handsome little (I mean large) profit with which to pay those ever so clever investment bankers for all the hard work of making a few phone calls.
    If this sounds too tame, then simply up the risk exposure and put the money to work in the emerging markets, where a balanced portfolio would give you a nice return over the past 12 months.
    The important thing to remember is that this is not really your own money that is at risk. It is the government's (i.e. taxpayers) who we all know will not dare let any major bank go under, since if that was really the case, then the US would simply reverse the rules which were bent in 2008-2009 to allow the banks to play games with the mark to market exposure they had in the housing market.
    So you see loose money in the US, Briain and Eurozone is not a problem in these places, since the inflationary impact has already been exported to China, India, Vietnam, Russia and Brazil to name but a few of the countries that are experiencing inflation rates in the range of 7-12%. Of course, eventually this will all boomerang back to the 'developed nations', but hey, that's tomorrow. Today, the banks are making money, the bankers are paying themselves fat bonuses and all is well with the world Right? Yeh, right!

  • Comment number 53.

    The only way to fix the banking industry was with loose monetary policy.

    But for most things there’s a price.

    Someone, somewhere, has to pay.

    Retail price index (all items) RP02:
    Jan 2009 210.1
    Nov 2010 226.8
    Price inflation = + 7.95%

    Average weekly earnings whole economy (not seasonally adjusted):
    Jan 2009 Average weekly earnings = £444
    Oct 2010 Average weekly earnings = £442 (provisional)
    Increase = – 0.005%

  • Comment number 54.

    @20. At 00:04am on 14 Jan 2011, foredeckdave wrote:

    Yes. I find it annoying to be treated like an idiot when commodity prices hit the headlines. As you quite rightly note we are constantly fed complete manure on this issue. Production shortfalls, bad weather (the latest rubbish being floods in Qld(!?!) which are also apparently about to become responsible for a 30% 'spike' in coal prices. Bonus season for someone is it?), harvest and distribution problems etc etc etc. Of course these have an effect, but the fact is that in order to prop up the excesses to which the world's financiers have become accustomed, basic foodstuffs are being traded like housing, gold and energy.

    PS Don't hold your breath waiting for a return to 'normal'. This is 'normal'. What substitutes are there for food?

  • Comment number 55.

    This is the time for the UK supermarkets with margins exceeding 10% in contrast to those of continental rivals around 5% need to cut their margins and support the people of this country in a way bankers and other companies never do.

    This is a great opportunity for the Board Directors to deliver value for their customers - something they have historically failed to do. Bet they never will.

    This will then increase inflation that will raise interest rates and end discretionary purchasing that will cause the jobs increase to stall. Nice job UK plc.

  • Comment number 56.

    #48 foredeckdave

    Perhaps for some commodities. However if you look at wild fish (for example) the end is nigh a lot sooner than you think.

    Its been predicted that by 2040 - given the current fishing effort and demand - that current wild stocks will be in terminal decline. Fish provides the majority of protein for 40% of the words population therefore other sources of protein will have to be found if fish is no longer available. Which in turn puts pressure on the under utilised resources which you refer to.

    This is a bit off topic (my fault!) but by ignoring the rise in population, as the Sage @ #1 points out, as a problem we are just storing up the biggest potential calamity we, as a species, have ever faced.

  • Comment number 57.

    Re 35 "as an economist do you not believe that recent calls by some commentators for a rise in interest rates to combat inflation are premature"

    A 'neutral' interest rate would be at the same level as RPI - i.e. preserving value in real terms of loans and savings. If RPI rises by 1% then interest rates should rise by 1% - a further rise would be discouraging to recovery.

    As RPI goes up, the effective interest rate is reducing - at present a bank rate of 0.5% and RPI of 4.7% means that borrowing money is effectively free. Banks can therefore make lots of money and pay themselves big bonuses.

    Why do you think NS&I withdrew index-linked bonds? Banks could lend money at (say) 3%, borrowing what they needed from the Bank of England at 0.5%. Their friends (to whom they lent this money) could buy index linked bonds from NS&I and sit on them. The Government would then borrow this money on the international markets - they would have to pay more than 0.5% for this unfortunately - and so Quantitative Easing was invented and the Bank of England printed the money to fund this scam. Quite funny, really. The practice continues as holders of these Bonds ARE allowed to renew them when they expire.

  • Comment number 58.

    47. At 09:59am on 14 Jan 2011, davidbrent wrote:
    Let them eat cake!
    ------------------

    Sorry, I forgot that this was a blog about onion prices rather than bread prices. That should have read... Let them eat shallots!

  • Comment number 59.

    "The rest is due to (hopefully) temporary hits to supply, from crop failures ... "

    Very hopefully I would say. Global warming means more water evaporation and what goes up must come down, hence the record rainfall being experienced in several parts of the world, and the resulting damage to crops.

    Too little water sometimes and too much at others could become regular features of the 21st century.

  • Comment number 60.

    42. At 09:25am on 14 Jan 2011, Gilthead wrote:
    Sage_of_Cromerarrh @ #1


    I think this short series of videos demonstrates very clearly the point that Sage is making.
    Watch them and you will see that that that everything needs to shrink rather than grow....starting with the population.

    http://www.youtube.com/watch?v=F-QA2rkpBSY

    Have a look, very well put together.

  • Comment number 61.

    I'll try posting a link (it must be possible as others have done it!). A picture is worth a thousand words after all.

    If you want to see the likely year-on-year inflation figures for December and January, the latter including the effect of VAT going up to 20%, (and without the December hike in food prices that has been widely reported), then look here:
    http://www.svrsig.org/inflate.pdf

  • Comment number 62.

    Just to mix it up, you might to know that the farmgate price in the UK for a litre of milk is about 26p.

    A litre of milk from our favourite supermarket ( Every little helps...) is about 80p.

    Bearing in mind that farm milk also contains about 5-10% cream, sold separately, and the process of bottling milk is a mature low cost industry, where do you think the profit is?

  • Comment number 63.

    30. At 03:13am on 14 Jan 2011, foredeckdave wrote:
    ====================================
    Many thanks for your reply, and I agree with all you have said.

    I would love to get real evidence that cannot be doubted that it is speculation using QE money that is causing the rise in inflation.

    The only puzzle I have is why the inflation in UK is higher than elsewhere?

    I suspect we are seen as a pushover and mugs!

  • Comment number 64.

    Stephanie could we please have some economic analysis? Following on from the dot con bubble we had the asset price bubble following the collapse of the asset price bubble we have had a mini bubble in metals and clearly the hot money is now speculating in crops/ food stuff.
    It seems to me that at a macro level that supply/demand breaks down as the determinant of price level as more and more speculators inflate the next bubble.... so the real question is what can individual governments or even the G20 do to stop this recurring problem as from the speculators position (IB's and individuals) they are acting rationally in trying to maximise their returns.

  • Comment number 65.

    Isn't this entirely predictable? With the other major license to print money - property / real estate - suppressed, wouldn't the vultures naturally gravitate towards speculating on commodities?

  • Comment number 66.

    A couple of points if I may.

    Raising interest rates will have some effect in reducing inflation as it raises the value of sterling reducing import costs, and we are a net importer. The downside is more serious to the UK economy at present hence the lack of movement on this and much crossing of appendages.

    Secondly, regarding Stephanie's grammar in this blog - anyone who looks as HOT as Stephanie can foul up as much as she likes in my opnion, all is forgiven :-))

  • Comment number 67.

    Re 62:
    "where do you think the profit is?"

    Surely all that profit is not going to the lorry driver?

  • Comment number 68.

    Re 63: "I would love to get real evidence that cannot be doubted that it is speculation using QE money that is causing the rise in inflation."

    QE is known to be inlationary - surely the exact mechanism is immaterial?

  • Comment number 69.

    I see the VAT rise triggering serious inflation everywhere, my sons small bag of chips up from 80p to 95p and that order of inflation is everywhere, but glad S_O_C got in at #1 with that very clear message about rising population, and I might add expectations!, and shrinking resources not least energy. I wonder why economic commentators seem to have such a blind spot for these fundamental factors in the worlds economic situation. I guess the saving for retirement thing is going to be really hard to sell going forward, look forward to seeing the financial industry try though, should be a laugh. Think I need a little Xtra help.

  • Comment number 70.

    For anyone seeking clarity regarding the reason why inflation effectively reduces debt (particularly AWD @ 28 but other contributors too), it is that inflation reduces the value of money...and therefore the value of any debt taken on prior to the onset of the inflation. Ergo, the greater the inflation percentage, the greater the reduction in the value of money and any debt.

    To quote Robert Peston from 2008...'However, if you've borrowed too much, what you want is the value of money to decline - serious inflation is your best hope of avoiding the full and proper consequences of your imprudence.'

    But real terms debt reduction is about the only potential benefit of excessive inflation, in all other respects it's a pretty evil beast - as anyone old enough to remember the 70s will testify - which is why I have to wonder why this (and the previous) government consistently allows UK inflation targets to be overshot. Depending on which index you rely on, UK inflation is now between 3.7% - 4.5% and rising....for what reason other than a spot of National Debt reduction is this trend being allowed to continue unfettered?

    Also, likening household income/expenditure to national income/expenditure is, IMHO, not very realistic for a whole host of reasons, not least a national government's option to print money to make up for income shortfalls on occasion. Not an option for mere householders alas.

  • Comment number 71.

    Of course prices are rising. The world has been flooded with QE dollars and the banks are not lending but speculating.

    Remember the massive hike in 2009 in all commodity prices?

    The financial world knew it was in deep, deep trouble and the casino frenzy to cover the losses moved into the staples...look at wheat, oil and even rice.

    Western finance created this inflation and the Obama government with QE2 are fuelling it.

  • Comment number 72.

    #18 Commodities in general are overpriced due to the derivatives that are booming on the back of QE monies on both sides of the Atlantic.

    It is all down to speculation. Hardly any real supply problems, that is all a smokescreen of spin.

    Whilst admitting to some small experience in many kinds of derivatives in many parts of Asia, I have never met any derivatives in onions !! Please elaborate on how the "QE monies on both sides of the Atlantic" forced up the price of onions in India by 5-fold !!

    Meanwhile, I'm off to make a bhaji or 20 !!

  • Comment number 73.

    Are you sure that it is all the banks' fault?
    Surely Rupert Murdoch must be playing a part.

  • Comment number 74.

    #64. It seems to me that at a macro level that supply/demand breaks down as the determinant of price level as more and more speculators inflate the next bubble...

    It would be very useful to see detailed analysis of how much the prices are from demand and how much from speculation. For years many of us on this blog have been concerned at the free (QE) money leaking into the real world (rather than just being used to artificially prop up bank balance sheets), and it does feel like this is now happening.

    Because most large commodity purchasers use fixed (hedged) long term prices in contracts for many months ahead, a lot of these inflated spot prices will not be felt for a while. It will not be surprising to find in 6-12 months time large step jumps in prices for almost everything, as purchasers find that the next large batch being ordered now has many months of these rises included.



  • Comment number 75.

    "Just ask the Indian prime minister, who recently authorised emergency onion imports from Pakistan - after the domestic price of an onion trebled, in just one month."

    Oh, the joys of protectionism !! India forced a protectionist policy on onions produced in India to the detriment on onion producers elsewhere. Now that they are *VERY, VERY* short on onions in India, the other producers are probably saying - sorry, we have to cut down on our own onion production because we couldn't sell to India and now we are short, too !! Perhaps you can try making garlic bhajis instead !!

  • Comment number 76.

    #27 >>For example, there is NO shortage of wheat because millions of tonnes are stored for emergency use (like crop failures).

    Whilst there is no *GLOBAL* shortage of wheat due mainly to prudent nations storing up wheat in the good years, there are local shortages of wheat in many parts of the world due mainly to short-sighted governments not making food security a major priority issue.

    This story sounds familiar and I think I may have read it in some book or other !! ;-)

    In actuality, there is *NO* shortage of land for the growing of food !! However, there has been large scale attempts to turn good food producing land into cash crop land (many of the developing nations) and, even worse, to turn food into fuel (the US being the main culprit but all of Europe is not untainted) !! All this contributes to the rising cost of food world-wide !! Bad weather and natural disasters don't help but prudent governments would have tried to buffer their crop supplies for those lean years during the good years !!

    Come back, Joseph; we need you !! You can even bring your ghastly technicolour dream coat with you !!

  • Comment number 77.

    15. At 10:49pm on 13 Jan 2011, SleepyDormouse wrote:
    To those who wrote in response to my posts on the previous topic, many thanks. I have just posted a reply at the end of the series

    Hi Sleepy

    And here we are again less than 24 hours later discussing another domino that may the one to cause the collapse.

    In one way it is heartining to see so many comments on here recognising the raising commodity prices is down to banks speculating with all their QE cash.

    Ofcourse economists will explain that the droughts and floods of last year (and this) are affecting supply. One cannot argue with that but the banks are driving the prices higher than a true free market economy would normally stabilize at.

    So we can add inflation to US default, Euro crisis, Foreclosure Gate, Wikileaks bank expose that may trigger the collapse. And finally with rising inflation, falling wages, strikes, higher unemployment and obscene bank bonuses then civil unrest will also spread like wildfire.

    I'm still sticking with June 2011 as the tipping point.

  • Comment number 78.

    This looks to me like a change in demand but demand for what? It could be demand for food, demand for oil, demand for dollars. A comparison is needed with other commodities that have differing relationships to population, affluence and dollar price. Each possibility needs to be considered separately. There aren't many answers in the blog or the comments at the moment but thanks to the people who have posted some facts.

    re. The relationship between inflation and interest rates. This is pretty basic stuff. Interest rates are meant to be a mechanism for controlling demand for money, therefore goods. In my opinion, demand for money is currently floating freely without much connection to interest rates. It would be great to see an analysis of where the cheap money is going because there is probably no surplus demand for debt. If bubbles are being created elsewhere then there is a possibility of further damage to real economies.

    In response to the numerous Benthamites on here. I believe that price is determined by surplus demand. I will argue this on future blogs when I think it's relevant.

  • Comment number 79.

    Regarding: Comment 70 from ciderwithdozy.

    I would still disagree with the general idea that inflation equates to debt reduction. As my example showed, it depends on what type of debt and what type of inflation is being discussed.
    My understanfing is that inflation is a relative measure of price change against money.
    Lets say the government turns on the money printing press (or asks the Bank of England to) and then pumps this into the economy. I think it is clear that if they keep doing this, this will cause inflation. I think it is also clear that even though inflation is a relative concept, most people could still see that the value of commodities to people have not really gone up (i.e. more scarce). What has happened is that money has lost its value.
    Lets step forward in time to the point where we are witnessing the last 5 barrels of oil being extacted from the ground, and rich investors all want to buy them (at near any cost) so that they can store these along with their art and wine collections to impress their friends and assocates (and also, perhaps as an investment). Just because some inflation measurement said that changes in the oil price should be reflected in inflation calculations, I think most people could see that if the last barrel of oil sold for £350000, money has not really lost most of its value - its just the inflation calculation which has screwd up.
    So to get back to my point with the guy earning £25000 and a debt of £20000, I think his debt will not disapear just because the value of commodities around the world increase in price due to higher demand. No doubt this would cause a lot of inflation. And no doubt relative to the new price of commodities, the debt is reduced. But since his salary is in sterling, his debts are just as heavy, and in fact, his ability to pay off his debts made more difficult.
    Should government start printing too much money and cause inflation, then I could see how this type of inflation is such that many people in employment can simply re adjust salaroes, eventually leading to price rises, as everyone in the country compesates for goverment devalueing money. And, in this case, the debt is left the same denominated £s, and so relative to income, now less of a burden than before.
    But I don't see how increased demand throughout the world for limited resources, which leads to increased prices, has the same effect in reducing debt. Reducing debt relative to the price of commodities - yes, I do. But reducing debt to relative to the burden on the people with debt - no.
    Probably me not being an Economist is leading me to misunderstand the definition of inflation.

  • Comment number 80.

    The end of cheap energy means that the rate of exploitation is under pressure.
    The rate of exploitation is simply the portion of the cake that goes to the workers.
    As the basic goods required to maintain living standards rise in price (or more specifically value terms), a larger portion of work time is required to produce them & this puts downward pressure on the amount available for reinvestment (which affects future growth) & surplus value that goes to non-productive workers, e.g. the public sector.

    So the capitalists are caught between a hit to profit rates or forcing a fall in real wages on the workers & the risk of riots/revolution.

    They only anwser to date has been to print money in a vain attempt to maintain aggregate prices (& profit rates) above values.
    This will only result in debased currecies.

    The stagflation of the 1970's would be a good outcome for the ruling class.
    More likely is a decline in output & double digit, even hyper inflation shrink-flation!
    Best start reading about the Weimar Republic.

  • Comment number 81.

    #70 CiderwithDozy

    With respect I, and I think others, recognise that inflation reduces the value of money (and so the value of the debt). Despite the popular belief, however, an increase in prices is not inflation!

    Quantitative easing and other measures that increase the money supply are inflation: and may result in higher prices. Higher prices do not result in an increased money supply - unless we see inflationary price/wage spiral that Charles #35 fears.

    Only then will the level of Government debt start to fall relative to tax revenues.

    Price increases mean that everything becomes more expensive not that money becomes cheaper.

  • Comment number 82.

    24. At 00:27am on 14 Jan 2011, SleepyDormouse wrote:
    14. At 10:39pm on 13 Jan 2011, Up2snuff wrote:
    "...The pressure on GO for the February/March Budget grows by the day."
    -----------------------------------
    This would admit total financial policy failure, and so must be highly unlikely - sorry, but at the moment its wishful thinking, IMHO. Flying PIIGS? Now there would be a sight. If they crashed and burnt, there would be an excuse, oops sorry, reason....

    I can hear it now from the dispatch box:
    "We supported Ireland, sorry cannot afford to do more, but we've proved our european credentials!"
    -----------------------------------------------------------------------
    So, are you saying GO can sit back for three years at least, possibly four, and do nothing?

  • Comment number 83.

    Stephanie,
    I wonder why you have made no mention of 2 other factors that could contribute to this problem.
    1) The EU Common Agricultural Policy (CAP) which encourages farmers not to produce and pays them not to do so allowing the EU to artificially keep prices inflated and supply suppressed.
    2) Commodities are traded and would it not be the speculators in these markets that would also be pushing up prices. (A recent interview with a cattle farmer was revealing. In it he stated that wheat crops were bountiful so supply was not the issue, it was however speculators who were keeping the prices high and hence pushing up feed products).

    The farmers in Afghanistan seem to be able to produce plenty of poppy crops, perhaps even more effort should be put into encouraging them to produce food crops instead in return for the aid and support that is pumped into that country. That would help with global supply and would be a useful contribution instead of crops cultivated for drugs.

  • Comment number 84.

    re #36 & 38
    Do not price shocks, although apparently temporary, leave a residue of proper, longer lasting inflation?

  • Comment number 85.

    re #76
    Any posters care to hypothesise on how long before a world Government arrives? Or is that too much of temptation to go off topic on an economics Blog?!

  • Comment number 86.


    For weeks now there has been a growing divergence between the commodities (including grains)prices and the Baltic Dry Index as the former rallies while the latter sinks almost daily.

    Demand for food is actually lower than last year but the price is rising as futures contracts in 'life essential basics' are rising and rising.

    Reason. Hot money has lost faith in government paper and is moving into 'things'.

    This 'hot money' is the debt created by QE and QE2 as the West desperately tries to fill the deflation hole created by the greatest bubble of all time.

    Rising prices mean inflation.

    Expect more food riots a la Tunisia and worse.

  • Comment number 87.

    Commodities are important because they are essential in the production of other goods. Some commodities include wheat, barley and oil. Even fruit juice is traded as a commodity. These commodities are traded constantly on commodity exchanges around the world such as
    - Chicago Mercantile Exchange and
    - the New York Mercantile Exchange.
    Since commodities are traded on exchanges, their prices are not supposed to be set by any single individual or group. On the exchanges, commodities are traded via futures contracts. These contracts obligate the holder of the contract to buy or sell a commodity at a predetermined price on a delivery date SET IN THE FUTURE. Not all futures contracts are the same - their specifics will differ depending on the commodity being traded.
    As with equity securities, a commodities futures price is supposed to be determined primarily by supply & demand. e.g. oil. If the supply of oil increases, the price of one barrel of oil will decrease. Conversely, if the demand for oil increases, the price of oil will increase.
    There are many economic factors that will have an effect on the price of a commodity. Although commodities are traded using futures contracts and futures prices, events that occur NOW will affect the futures prices.
    For other commodities such as crops, weather plays a significant role in price changes. If the weather in a certain region is going to affect the supply of a commodity, the price of that commodity will rise.
    As with other securities, many traders use commodity futures to SPECULATE on future price movements. It's a great area for the utilization of "inside" information. These investors analyze various events in the market to speculate on future supply & demand. They subsequently enter long or short futures positions depending on which direction they believe supply & demand is moving. (They are too often assisted by front-end platform i.e. computers that do the projecting, factoring, analysing, and in the end: set the rate. This is why you will find a big FUTURES SECTION IN ALL INVESTMENT BANKS TOO BIG TO FAIL.)
    Also, scenarios like this one occur far too often: Government is secretly planning to attack (say Iraq), the price of oil will increase, and anyone with this insider knowlege is now in a position to make money on a FUTURES CONTRACT.
    In my opinion, commodities price setting is in need of reform so that it reverts to true supply & demand - no insider trading, no creation of demand that will affect prices (like storing vast quantities of wheat which will of course, force prices up), no manipulation...
    Is there any country that doesn't manipulate to a certain extent?

  • Comment number 88.

    When Brent Crude trades at 9% over West Texas Intermediate you know that hot money is up to something.

    Hot money only exists because Gordon Brown (and his pals) saved the banks and the investment portfolios of the 'rich' and subsidised them with your and my future taxes.

    Can't blame the banks. If you don't regulate correctly, they just chase the short term profit.

    Glad young Milliband agrees on this.

  • Comment number 89.

    81. At 1:58pm on 14 Jan 2011, tFoth wrote:

    #70 CiderwithDozy

    With respect I, and I think others, recognise that inflation reduces the value of money (and so the value of the debt). Despite the popular belief, however, an increase in prices is not inflation!

    Quantitative easing and other measures that increase the money supply are inflation: and may result in higher prices. Higher prices do not result in an increased money supply - unless we see inflationary price/wage spiral that Charles #35 fears.

    Only then will the level of Government debt start to fall relative to tax revenues.

    Price increases mean that everything becomes more expensive not that money becomes cheaper.


    Au contraire. Money has never been cheaper than today. Therefore we have inflation.

    Control the money supply, interest rates, and suck in the 'numbers' and inflation tails off.

  • Comment number 90.

    One of the issues of a world economy. Local prices competing with prices in higher markets. As not all economies are equal and the poor and developing nations are placed at a great disadvantage, not the sellers but the people who rely on food to survive. Profit cares not for political stability or starvation, just profit. As the basics of water and food become less available the politics on many countries will become more interesting.

  • Comment number 91.

    84. At 2:18pm on 14 Jan 2011, Up2snuff wrote:

    re #36 & 38
    Do not price shocks, although apparently temporary, leave a residue of proper, longer lasting inflation?
    ~~~~~~~~~~~~~~
    I remember seeing graphs about this, in respect of the sugar shortages (mid 70's?) and other subsequent price hikes that played the "me-too wannabe" card.

    The conclusion of that far off and dimly remembered textbook was that in the short term, price hikes can be the result of market manipulation, but that they will return to the underlying price point quite quickly unless there is a genuine reason.

    In the case of sugar, something political happened to the UK supply, but I can't remember what it was.

  • Comment number 92.

    Thoughts on the QE Question (raised above by several contributors above)

    Isn't the real question about QE - what it is spent on? If it is spent on procuring something of lasting value, such a roads, railways, sewers or nuclear power stations then it is an investment that is likely to be beneficial to the country in the future. If QE is just used to prop up financial institutions and keep interest rates down then it will be a complete waste and hugely detrimental.

    QE will without a shadow of doubt be inflationary (History shows us this) - just as are the daft interest rates - but if we get something of value then perhaps it could (have been) be of value in rescuing the economy.

  • Comment number 93.

    #88. blefuscu wrote:

    "Can't blame the banks. If you don't regulate correctly, they just chase the short term profit."

    Hence my view of King and Bernanke (FoTs and DoCS - see earlier)

  • Comment number 94.

    @79 AWD

    Well you're fully entitled to disagree, but if there is such a thing as a fact in the clouded, shrouded world of economics, it's that inflation reduces existing debt liabilities, both for nations and individuals. Google debt and inflation and read a few articles on this - there's some very intereting stuff about the correlations between the two.

    @81 tFoth

    Inflation is exactly defined as a rise in prices over time, as any dictionary will confirm. QE or other measures that increase money supply will probably cause inflation, but most certainly do not define it.

  • Comment number 95.

    I don't agree with your assessment that rising food prices will bridge the gap between rich and poor. In a country like India, most of the profits as a result of high prices in agricultural goods goes to the middlemen. I see a long way to go before the middlemen are cut out of the chain and the farmers directly get the benefit of high prices in agricultural produce.

  • Comment number 96.

    With regard to commodity price hikes in the UK, surely the devaluing of the pound by 30 pct over the past 2-3 years with the gov't + BOE approval is ther main cause.

  • Comment number 97.

    Food prices are on an upward trend in the UK because our govt and banks, supermarkets and regulators do not give sufficient 'support' or priority to British agriculture ... particularly small end farmers and growers.

    Most of our UK food is controlled by a handful of over-powerful supermarket chains and import sucking spivs and manipulators.

    If we are to pay higher food and energy prices, in the UK and have higher inflation and interest rates to go with it ... then our govt should have a strategy for getting it under control interms of imports and incentivising British farmers to produce and sell.

    This might mean passing UK legislation so that every larger/medium size supermarket in the UK has to give up at least 25-30% of its sales premises floor space to to allow farmers to sell British agricultural products ... direct to the British public.

    This would be in addition to e.g. higher import taxes/tariffs on 'in season' food produce imports.

    This would also stimulate British 'growth' ... the politicians' 'holy grail' ... reduce imports and allow better control of UK prices and availability going forward.

  • Comment number 98.

    #78 Hacky The Hufrex

    "In my opinion, demand for money is currently floating freely without much connection to interest rates."

    Yes. This may be evidence for the theory that token money largely follows the quantity theory of money - i.e. double the money supply, all things being equal, you double prices.
    This may also explain why we had inflation in the 1970's even though the economy wasn't at full employment.

  • Comment number 99.

    With the vast majority of this countries workers scandously earning just above the minimum wage and not the governments £26.600 average wage it thinks we earn its not going to take long before it all goes pear shaped.Everything too expensive,no money left to spend at the end of each month,no new car this year,put off the new T.V this year,cancel the holiday this year,no new three piece this year,from now on only buy cheap,low quality store branded items.Thats exactly what is coming,its unavoidable unless they drop prices across the board substancially or pay us all that average wage of £26.000.Dont hold your breath though.Its going to be an interesting year and a miserable future for most.

  • Comment number 100.

    Regarding post 20 I should say that I've just heard a rumour that scientists at the university of Sophism - motto 'Media Coverage For Research Grants'- predict that unprecedented activity in the Crab Nebula, death rays from Mars and the residents of Oklahoma eating more than their fair share of beans (you don't want to know), could greatly reduce next year's maize crop...This, I should add, has nothing to do with my recent purchase of one billion bushels of maize, at a knock down price, on the futures market.

 

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