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The Reuters Commodity index soared to record highs on January 30th, led by explosive advances for base and precious metals, along with higher crude oil, sugar, coffee, and soybean prices. China's economy grew at at 10% last year, while India's economy advanced by 8% in 2005, and both countries are large importers of raw materials from abroad. Both countries account for one third of the world's population.

Higher commodity prices are telegraphing higher inflation, but G-7 central banks are reluctant to combat the CRB index with tighter monetary policies. The Federal Reserve and the European Central Bank are expected to hike their lending rates by a quarter-point this week, but not high enough to restrain hedge fund traders in commodities. The FTSE 350 Mining Index has risen by 85% since the start of 2005. Mining companies and oil producers - led by the likes of Rio Tinto and Shell now make up 27% of the FTSE. Last year, China soaked up 20% to 25% of global base metal output, compared with 5% in the 1980s. Analysts estimate that a 20% swing in commodity prices could impact the profits of mining companies such as Rio Tinto (RTP) and BHP Billiton (NYSE:BHP) by up to 35 per cent.

Reuters Commodity Index

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Source: Reuters Commodity Index Soars to Record Highs, Signaling Higher Inflation (BHP, RTP)