Fearfully good

Oil is down 17 per cent from its May peak. The drop might reflect the fear of a renewed recession. But, the fall can stop that danger being realised. Price cuts can be good for you. Policymakers should avoid reversing these. The commodities’ slide ends a period in which economists and commodity buyers seemed to be living in different worlds. The economic story was of a frail world that could have failed. Yet, oil and most other commodities rose into the stratosphere. They are still far from falling to earth. Brent is still 32 per cent higher than last year. The apparent disconnect can be resolved. Even as growth has been weaker than hoped in developed economies, it is still strong enough in emerging economies to help keep prices high.

But, investment and monetary factors are also at play. Investors have turned to commodities to profit from emerging market growth. And, the latest commodity bull run began in November 2010, when the US Federal Reserve launched its $600-billion second round of quantitative easing. The programme ended in June. The global market retreat started a few weeks later. Whatever its cause, the inflationary impact of higher commodities is strong worldwide. While US gasoline prices are up 32 per cent from the past year, UK fuel prices are up by 17 per cent. Higher pump prices help explain why western consumers are parked.

As far as emerging economies are concerned, commodity prices have helped push inflation to 6.2 per cent in China, 7.2 per cent in Brazil and 8.4 per cent in India. Interest rates in emerging economies have been rising. The tightening is beginning to tell on EM growth and that of the world’s. Lower commodity prices will reverse these bad trends, putting money in the pockets of western consumers and calming central bankers in emerging economies. The lesson may be that in a globalised world economy of swift capital flows, money printing as a form of extreme stimulus risks is counter-productive because the printed money flows to economies already growing fast. It may, therefore, take an end to stimulus to produce non-inflationary growth. Thus, the Federal Reserve should not rush to calm market nerves with more money printing.