Commodities show inflation

Many economists are sounding an alarm bell regarding deflation. The commodity market movement however, appears to contradict these concerns. The demand for basic agricultural products, raw materials and other commodities remains high pushing the prices to an upwards rally. A clear indication is the wheat price which currently is on highest peak of the last 22 months – partly justified however, due to the unprecedented drought that has gripped Russia. At very high levels also is the price of coffee, even sugar – which had received strong pressures during the first months of the year is now in recovery orbit.

According to data from Reuters, the price index of goods to the central bank of Australia was in July in the second highest ever, recording gains of 25 % since March. It is obvious that commodity prices have again picked up after a short break due to the sliding of the global economy.

Why this trend is happening can be explained quite easily as China, which is very close to winning the title of second largest economy in the world, has a high development rate. The demand for raw materials and other goods has not diminished despite the shift of Beijing to a more restrictive policy. Even the economy of United States, despite the slowdown, continues to grow at a relatively good pace.

Therefore the increasing price of goods is only reflecting the recovery of the global economy and especially the boom from Asian emerging forces. News for Australia and other major exporters of commodities such as Canada, Russia and Brazil are better than ever. However, this is not as good for consumers in the west countries who see the commodity prices to rise, while unemployment remains stubbornly high and the monthly income under pressure.

However, the consumer price index is now very low which suggests that a small increase in inflationary pressures is more welcome by the threat of deflation. By the term of deflation we are referring to the price deflation. In this case, the deflation is something good because it forces the constructors / suppliers of goods or the providers of services to lower the cost of the their products due to competitive forces such as telephony, higher productivity rate (because the use of computers) or during an global economy crisis as the one we experience now.

The reduction of the prices in consumer goods over time is not bad at all as this increases the quality of life standards as consumers can buy more with less money. This is exactly what reverses a static market to a market that moves upwards as people will start buying and investing even if deflationary pressures continue.