Inflation in South Africa & the Global Commodity Cycle

…There’s a whiff of panic in the commodity markets, isn’t there? Bullish buying has turned into investment hoarding. What comes after that? If this were a normal commodity cycle, high prices would signal producers to crank up production. Supply would increase to meet demand, and prices would fall.

This is probably not a normal cycle. Soft commodity prices are distorted by government subsidies, for example. This is true in developing and developed economies. In the developing world, government subsidies of food and petrol have kept official inflation low. Those subdivides have also prevented higher prices from discouraging demand.


The trouble today for governments that subsidise food and petrol is that it’s getting really expensive. With oil over $100 and grain prices soaring, paying wholesale rates on the global market is going to be a drain on local currency reserves. Sooner or later these governments will have to allow prices to rise. As we’ve seen in Burma, China, and even Italy and other places, suddenly soaring food prices are not a political winner.

Demand will have to fall. But prices will probably fall too. It’s hard to say how much investment demand is responsible for rising commodity prices. But judging by the action in global stock markets, investors are a lot happier buying gold, corn, and soybean futures than they are buying stocks. New York fell by 3% on Friday on more weak data from the U.S.

Daily Reckoning