Message in a barrel

Global inflation: The global oil price is back up above $90. A gauge of manufacturing exports in the UK is at a 15-year high. US Treasury yields are rising. The link between these apparently disparate stories is that the world is reaping what it has sown. Deflation is over and inflation is coming back – perhaps strongly.

The oil price spike reflects a broader trend in commodities. The Reuters-Jefferies CRB index of commodity prices has risen 20 per cent since the end of August. Copper, gold and silver are all muscling to records or at long-term highs. There is more to this than simply loose money and speculation in commodities markets. In 2008 and 2009, speculators shorted the dollar and went long commodities – physical goods seemed safer than the paper central banks were printing so liberally. The difference now is that the dollar and commodities are rising together. Meanwhile, yields on 10-year US Treasuries are also climbing, above a still low three per cent.

The growing belief in the markets is that double dip has been averted and that growth and inflation are coming up. Barclays Capital raised its 2011 US growth forecast after the deal between the US administration and opposition Republicans on retention of Bush-era tax cuts. Markets are factoring in recovery. That looks bearish for very expensive bonds but positive for commodity prices.

This, after all, is what policymakers have aimed at. Fiscal and monetary policies have been ultra-loose in most major economies for two years. In the United States, the twin levers remain full on. Global growth is picking up and trade and exports are soaring. While that is welcome, there is a strong inflationary element in the recovery.

The implications of rising commodity prices are many and complex. Inflation is hurting poor consumers in emerging economies. Markets wonder how much the monetary tightening China has already announced may curb growth and demand. And rising prices that are causing problems in emerging economies must soon spread west. They are already washing up inconveniently in the UK, keeping inflation above three per cent and deterring further money printing. As prices rise, loose money must be reined in. Markets may enjoy growth in 2011 but the price of money, too, seems certain to rise.