Martin Wolf:
A rise in the relative prices of commodities may reflect inflationary pressures. It may also cause inflation. But it is not itself inflation. Such a rise is also precisely what we are seeing. If one deflates the rise in commodity prices given above by the increase in the unit value of exports of manufactures from high-income countries, one obtains the following increases in real prices: 147 per cent for all commodities, 192 per cent for energy, 77 per cent for non-energy, 131 per cent for industrial metals and 104 per cent for agricultural commodities.
What we are seeing then is a global shift in relative prices, with commodities, particularly energy, becoming much more expensive, relative to manufactures. If one deflates the price of crude oil in the same way, it is more expensive than at any time since 1970.
What is behind these surges in commodity prices? The big story is the impact of emerging economies and, overwhelmingly, of China, which has accounted for the bulk of global incremental demand for industrial raw materials. Between 2000 and 2006, it also generated 31 per cent of global incremental demand for oil, against just 20 per cent for North America.
The strength of demand in emerging economies does not entirely explain the rise in commodity prices. Mandates to produce biofuels have also had an impact on demand for some agricultural commodities. Also important have been constraints on supply: bad harvests, inadequate investment and higher costs. The rising price of energy is itself a big reason why agricultural production has become far more expensive. Speculation seems not to be that important. If it were, inventories would be soaring. But they are not.
Because of the steep fall in the value of the dollar against the euro, any given rise in global commodity prices will have a bigger impact on headline inflation in the US than in the eurozone and the other economies with relatively strong currencies. It is not surprising, therefore, that the gap between headline and core inflation has been particularly large there.