The Fed is the culprit in commodity inflation

Commodity prices and real world trade volume tend to move in lockstep. Something different happened during the past year, when non-fuel commodity prices rose much farther than the modest recovery in world trade volume would have indicated.

The discrepancy between a tepid recovery in trade (compared with the 2009 snapback) and an unprecedented jump in commodity prices can be put down to the Federal Reserve’s tsunami of a monetary stimulus and the US federal government’s never-before-seen-in-peacetime deficits.

Practically, that means we are facing prolonged, nasty and persistent inflation driven by monetary policy, rather than “transitory” inflation due to real economic factors.

The real factors contribute to price pressures, to be sure. But the irresistible force of multi-trillion-dollar US budget deficits financed by $5 trillion of Federal Reserve asset purchases during the past year has hit the immovable object of sclerotic supply chains and a labor force reluctant to trade in souped-up unemployment benefits for a salary.

The International Monetary Fund’s economic blog acknowledges that cheap money is a factor, noting that “lower interest rates reduce the ‘cost of carry,’ which also includes cost of storage, insurance, and other expenses, and, thus, tend to support commodity prices.”