Commodity Prices Harm Global Economies

Commodities seem to be on a bull run which is inversely related to the overall economy. Everything from oil to rice has skyrocketed over the past years, and companies and countries are falling victim to the inflationary effects of these higher prices.

One of the latest companies to fall victim is low-cost carrier Skybus which is closing down and plans to file for bankruptcy citing high oil prices as the main reason for its insolvency. They started only around a year ago and oil prices were already high then, so they probably should have planned accordingly. ATA and Aloha Airlines will also stop flying this week citing similar issues.

Food prices have also continued to rise prompting authorities in China, Egypt, Philippines and other countries to take actions to try to prevent a crisis by curbing exports on rice and in some cases raiding warehouses to prevent “hoarding”. Rice (ZRN08.CBT) has doubled since last year and gone up over a whopping 500% since 2001. The World Bank said that 33 countries may experience unrest due to the continuing rise of food and energy costs.

These days, the Fed faces the risk of stagflation as it continues to lower interest rates. Treasury bond traders believe rate cuts may be over soon and yields have increased slightly over the past month. Most attribute this to the Fed’s support of JP Morgan’s (JPM) takeover bid for troubled Bear Stearns [[bsc]].

The big question though, is how much longer can the Fed continue to lower interest rates with commodity-based inflation continuing? Interest rate hikes are probably not the best way to tackle this form of inflation, especially with the housing market still in decline and the Reis study showing strip-mall vacancy rate is at its highest in over 12 years. Not to mention of course, the continuing credit market crisis and the lack of liquidity in many credit markets.

Subscribe by RSS Subscribe by Email