What Surging Commodity Prices Say About U.S. Economic Health

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Commodity prices--whether copper, cotton, coffee, or corn--are booming this year. Oil has again surpassed $90 a barrel and, as Paul Krugman notes in The New York Times, global commodity prices have risen by a quarter over the last six months. That matters because commodity markets may indicate a "global recovery" and signal that we live in a "finite world," Krugman explains, "in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices."

Krugman pushes back on conservative commentators who claim rising commodity prices stem from misguided Federal Reserve policy and herald severe inflation (where rising prices, and a corresponding decline in the purchasing power of money, breed uncertainty and threaten savings, spending, and domestic exports). Commodity prices are set globally, not in the U.S., Krugman argues, and they're increasing because of demand from an ascendant middle class in emerging markets. But not everyone agrees.

• History Proves Krugman Wrong, states Don Boudreaux in a letter to the Times: "It’s not true that vigorous economic growth necessarily makes resources more scarce ... Since the dawn of the industrial revolution in the mid-18th century, available supplies of coal, petroleum, iron ore, and most other resources have increased significantly--and, as a result, their real prices have fallen."
  

• The Data Proves Krugman Right, responds Menzie Chinn at Econbrowser. He graphs the price of oil in dollars and in euros over the last ten years and fails to see a substantial difference between the currencies. "If indeed oil prices were rising over the past month primarily because of monetary policies in the U.S.," he concludes, "one would expect the oil price change in the US to diverge from that in other economies not undertaking another round of quantitative expansion."
  

• It's All About Investor Interest, declares Daniel Dicker at RealClearMarkets: "Perceptions of a recovering global economy, emerging market demand and declining greenback are all causing investor capital to flood the tiny and delicate commodity markets, none of which were ever designed or intended to accept the kind of investor interest they are now receiving."
  

• Inflation May Be Inevitable Now, notes Douglas McIntyre at 24/7 Wall St. Like Krugman, McIntyre states that the scarcity of agricultural commodities and crude oil is real, and that the rise in prices for these commodities is "not merely due to speculative trading by financiers who hope to make profits." But he diverges from Krugman in thinking that inflation could spin out of control:
  

No one and no government has been able to effectively keep prices across many sectors of the economy from moving higher ... Businesses across many industries and across the world have no choice other than to test consumer and enterprise demand for higher prices ...

The inflation pressure will become more of a vise for companies that still face consumers and businesses that cannot afford higher price goods because they have not recovered entirely from the recession. The profits that are bound to be undermined by that pressure may be as large a threat to the economic recovery as anything else.

• Declining Prices May Ultimately Be Bigger Concern, says Alen Mattich at The Wall Street Journal: "Rising commodity prices will put a further clamp on consumption in both developed and emerging markets, particularly China, where households tend to react to rising inflation by saving yet more. So then deflation will once again be the major fear."

This article is from the archive of our partner The Wire.

Uri Friedman is the managing editor at the Atlantic Council and a contributing writer at The Atlantic. He was previously a staff writer and the Global editor at The Atlantic, and the deputy managing editor at Foreign Policy magazine.

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