to combat recession pose inflation risk
Matthew Robinson and Barani Krishnan - Analysis
NEW YORK | Fri Apr 3, 2009 11:29am EDT
- Economic recovery efforts in the United States and
abroad have raised the specter of inflation, with signs
they are already feeding a recovery in prices for oil
and other commodities.
Obama administration plans to spend nearly $800 billion
over next couple of years on a range of programs including
construction projects, while the Federal Reserve is
putting more spending power in the hands of consumers
and businesses to stimulate employment and economic
along with similar stimulus measures and interest rate
cuts around the world aimed at combating the global
economic crisis, are likely to give a long-term lift
to commodities that could eventually inflate prices
for consumer and producer goods, according to analysts.
all these things were to continue along straight line
trajectories, we would have greater demand for commodities
and a lot more money chasing the same number of goods,
and that's inflationary," said Peter Beutel, president
of Cameron Hanover in New Canaan, Connecticut.
down from record highs over $147 a barrel in July to
around $50 as the economic crisis hurts demand, may
find traction if the plans hike industrial consumption
and increase market liquidity. Already, oil has steadily
risen about 40 percent since mid-February and metals
similarly have gained about 30 percent.
is no doubt as we get a broader stimulus back in the
economy, some of the credit conditions unfrozen, capital
markets flowing again, at that point in time you will
start a new business cycle that will benefit industrial
demand and that is going to be the real driver (for)
transportation," said Eric Kalamaras, head of energy
research for Wachovia Securities in Charlotte, North
are up more than 30 percent in the first quarter, reversing
direction after a 60 percent drop in the previous six
months. Traders say the rally could continue into the
second quarter if stock markets remain buoyant and top
metals consumer China keeps up its recent buying.
which saw historically high prices last year, could
also get another boost with inflation, said Shawn Hackett,
a commodities strategist in Florida, who called a buy
on markets like wheat, sugar and coffee.
is where the rubber meets the road, where the deflationary
forces of demand destruction give up to the inflationary
forces of all the money that's being printed,"
from China and other emerging economies launched oil
and other commodities on a six-year rally to record
peaks before the economic crisis hit.
got a boost from a series of interest rate cuts by the
U.S. Federal Reserve starting in the second half of
2007, which spurred investors to race into commodities
as a hedge against inflation and the weak dollar.
The Fed has
lowered its benchmark interest rates to near zero and
introduced programs to encourage consumer and business
lending. In addition, it is effectively printing money
by buying U.S. Treasury bonds, and economists say this
increase in the money supply could ultimately lead to
rate cuts and stimulus programs have been implemented
around the world -- including a $585 billion fiscal
stimulus plan in massive oil and metals consumer China.
moves to reverse the economic recession have given a
lift to commodities markets, some energy analysts warn
that continued weak fundamentals like soft demand and
swelling inventories still pose significant downside
the market's anticipation of those inflationary risks
have been exaggerated and telescoped too quickly into
the present," said Edward Morse, Managing Director
and Chief Economist for LCM Commodities.
there is an eventual concern about inflationary implications
of what they have been doing as inevitably will be the
case when you are printing money."