Is Anyone Benefiting From Global Inflation?

Throughout the 1990s, the world (especially developed countries) enjoyed a combination of strong growth and low inflation. A low inflation rate continued to be the norm during the first five years of the new millennium. The causes of this phenomenon are varied and there's no consensus yet about the grade that these different causes have had in the process.

Among other reasons, (a) a growing labor supply, stemming from the introduction of a mass of workers from emerging countries like India and China, and (b) a considerable technological advance, specially in the IT sector, which allowed companies to manage their production and information processes at a much faster pace along with reduced costs, explain the period of sustained growth and low inflation.

This situation has changed meaningfully since 2006, as the general price level of countries all over the world have experienced an upward movement of considerable amount, with significant intensity in the last six to nine months. As in the previous process, it is difficult to spot the main reasons and assign an exact degree of responsibility to each of them, but a couple factors can be pointed out: (a) a continued and accelerated rise in commodities and (b) an increment in the money supply. The focus of this post will be concentrated on commodities; as for the latter situation, it will be a subject of another post.

From 2002 and beyond, commodities as a group have experienced an astonishing spike. The UBS-Bloomberg index of raw materials is at all-time highs, and everything, from oil to soybeans, are now at levels not seen in at least 30 years (in real terms). A rising demand from emerging countries (read: China, India, other parts of Asia) have pressured a supply that has barely grown in the last 15 years; this applies, for example, to copper, wheat, corn, soybeans, etc.

The increment in available income in developing nations has bolstered a change in consumption patterns that mean an increase in demand for agricultural commodities. Coffee, and the already mentioned corn, wheat, etc, have doubled in two years. This, of course, translates into higher food prices and, hence, higher inflation. Food spending obviously has a larger weight in developing countries' inhabitants, and therefore inflation rates are much larger in those nations, but this phenomenon of rising food prices and inflation is verifiable in developed countries, too.

So, as the title of this article questions, is there anyone who is reaping the benefits of this process? Inflation is suffered by all, though in different degrees, but there are some sectors that are basking from this event. Although the general price level is rising, the truth is that relative prices have experienced an imbalance, with commodities outpacing the rise of other sectors. This means that the producers of those goods are seeing the prices of the products they sell rise more than the products they acquire, with the consequent increase in their income and purchasing power.

Then, these producers are benefiting from an extraordinary rent which stems from the commodities boom. Farmers, oil producers and all the people involved in the commodities supply change are the big winners of this global economic stage. Although this can be seen in earnings of companies related to the sector, like Monsanto (MON) or Exxon (XOM), the main winners are the owners of the resources; that is, the owners of oil fields and farms that produce agricultural commodities.

It should come as no surprise that sovereign wealth funds from Arab countries are deploying large sums of capital on financial companies like Citi or Merrill; the profits coming from oil at $115 a barrel are astonishing, only comparable to the 70s oil crisis. Farmers of fertile land from countries like Argentina and Brazil, which have a high yield per yard, are making big profits from the commodities rise. The price of land has skyrocketed in those countries, so landowners have also seen a spike in their rent.

Food inflation is slowly transferring to core inflation. Sooner or later, food prices influence the general price level; however, relative prices still show a big gain for producers of commodities, and this situation, it seems, will carry on for at least the foreseeable future.

Comments

[Aly-Khan Sa...:]

Sir,

You say; Although the general price level is rising, the truth is that relative prices have experienced an imbalance, with commodities outpacing the rise of other sectors.

Surely, this entirely depends on your starting point. If you care to look on a longer term basis, many Commodities sufferred from a long period of price underperformance. This started to correct in 2002-2003 with the Oil and Metals complex. The Softs have only recently started to perform and I agree we have passed the tipping point in this regard. We are at the start of something and not even anywhere near the middle.

Clearly, the Beneficiaries are those who are long of resources. The Natural longs faced a one sided demand structure [The West] and the rapid arrival of China and India brought competition to that demand equation. It seems to me to be as basic as that.

Hence one could argue that Consumers [and the biggest Consumers are in the West] have paid an Alice in Wonderland price for their consumption. We are now reverting to a fairer price structure.

Our 'Goldilocks' economic assumptions were just that. They were too US and Euro centric.

The free ride is over. Investors have already taken note.

Aly-Khan Satchu
rich.co.ke

2008 Apr 28 07:54 AM

[WACG:]

Traditionally, the only people/entities that benefit from inflation are those who have a lot of debt (for obvious reasons). Inflation thus benfits The US gov or (in principle) the US tax payer.

2008 Apr 28 08:31 AM

[Sam Kaplan:]

Dear Aly-Khan Satchu: thank you very much for your comments. I agree with you that until 2002, commodities went through a period of severe underperformance; but as you point out, i am analizing the 2002 to present period. Of course, it would be really interesting (and it would be great if you had an article or information about it) to compare historical relative prices series.
Again, thanks for your comments

Samuel

2008 Apr 28 12:51 PM

[Enough with...:]

@Aly-Khan Satchu. You say: "Clearly, the Beneficiaries are those who are long of resources."

And that's exactly what Samuel said when he pointed out "Farmers, oil producers and all the people involved in the commodities supply change are the big winners". Nobody's is more "long" on agricultural resources than landowners.

To agree to the idea that prices would turn to be fairer we need to adhere to the notion that they were not such in the past. However, no illusionary pricing ever existed (as you refer in your Carroll-esque depiction). It's just that China and India didn't weigh as much as they do nowadays; with their incorporation the market players change, and this is reflected in prices. There's no room for a call on belligerence against westerners.

2008 Apr 29 10:17 PM

[Enough with...:]

As an addendum to my previous comment, I would like to note that where it reads "China and India didn't weigh (...)" I meant "China, India and emerging countries (...)".

2008 Apr 29 10:27 PM