Whether this upward trend in commodity prices ends in a crash or not will also have a large impact on the world's political makeup. Depending on the parties in charge in the US and Europe, fiscal policies could see rapid change--again, pending the fate of the commodity market. Rising prices in the oil industry have twice in the last 40 years pushed the US into a recession (1970s and 2000s), will food and oil prices combine to extend our economic woes?
Sunday, January 23, 2011
Rising Commodity Prices: Blessing or a Curse?
In the article, it reveals how commodity prices are rising globally and how that may affect both the US and world economy. In the short term, these rises are beneficial for speculators looking to make quick money. However, these higher prices are unstable, says The Economist. With food prices rising worldwide, rising prices of commodities could hurt those in developing (and some industrializing) countries. In the United States, rising prices benefit in the short term, yet smack of trends from early to late 2007, when the author of the article claims the the major downturn began. This downturn is blamed on the rising prices of oil, which constrained consumers' budgets, reducing their ability to buy luxuries and some more expensive necessities.
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This article does a very good job discussing the current impact that this increase in commodity prices has on individual economies and its impact at a global level. In addition, the article lays out a few possible scenarios that might be reactions to the rise in commodity prices. One of the most alarming to me is shown when the article states, "With inflation now above the European Central Bank’s comfort zone and almost double the Bank of England’s target, pressure to raise interest rates is growing". This can be extremely troublesome if proven to be the outcome due to the fact that the rise in interest rates would cause a drop in investment. Although there is no telling how much investment would be lost until the new interest rates were set, the combination of decreased investment and rise in commodity prices could result in serious economic difficulties. The other issue at hand is the disruption of supply and demand as demand is far exceeding supply. According to the article, natural disasters, such as droughts and flooding, are the primary reason for the increase in many food prices. In these circumstances, there is very little that can be done in order for supply and demand to reach a level of equilibrium.
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