Monday, February 14, 2011

How big is the threat of rising commodity prices?

I was a bit surprise. Food prices have been on the rise. Gasoline price at the pump has been going up. In emerging countries, people toppled their government because they got tired of their government of unable to solve rising food prices. Egypt is the latest the example. The level of intensity coverage by media and blog, however, is far lesser compared to 2008. During that time, many accused hedge fund managers were the evil doers. Some screamed about US $ 150 per barrel oil again recently but nobody seems to pay attention. It's like a new normal or a non-event to people.


If you look at this chart, we are still way off from 2008 peak. Advanced economies CPI is only 1/3 of 2008 while emerging economies is only half. So why worry?

China, one of the largest commodity consumers, has been very concern about inflation and firing a few shorts of interest hike. But interest rate and inflation are still not as high as 2008 when both of them were at the vicinity of 7-8%.

So is inflation fear overblown? Yes based on today's data. However, investing is about looking beyond today. 12 - 18 months from today, this will be a big problem. This also tells us commodity and equity still have some more legs to run. For now.

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