Causes and Consequences of Increasing Commodity Prices

Food costs more. Fuel costs more. Metals and other raw
materials cost more as well. But this is no traditional inflation.
Labor doesn’t cost more; wage rates are not rising, at
least not in the US, in the rest of the traditional “developed
countries,” or in many impoverished countries either; and so
there is as yet no wage-price spiral. In a typical inflation,
higher prices lead to higher wages, which in turn lead to
even higher prices; and so on. But up to now, it is just prices
rising and wages staying the same. Wage earners are getting
poorer in many parts of the world. Why is this happening?
Here are some factors commonly mentioned:
1. Increased demand for food, especially in China and
India, where wages and profits are increasing. This
includes increased demand for basic foodstuffs such as
rice, corn, wheat, and soybeans; it also includes increased
demand for meat and dairy, as the new middle class there
develops taste and purchasing power for items higher on
the food chain. Meanwhile, low wage levels there still keep
down wages here, so no increases are expected to keep
pace with higher commodity prices.
2. Increased demand for fuel and nearly all other raw
materials in the same countries. Since these are used as
inputs to agriculture, it means that extra cash now coming
to farmers from harvest yields will partly or entirely be lost
again to higher production costs. How this will balance
out for small peasant operators and for large modern
industrial farms is not yet clear. Already clear, on the other
hand, is increased use of farm products for fuel. Agricultural
ethanol production should push up food prices even
further while restraining fuel prices. Higher food prices
lead to starvation and misery among the world’s two billion
poorest people, who depend on food relatively more
heavily than on fuel; yet the trade-off makes sense to most
people in the United States and other “developed” regions,
who are not so close to starvation, and for whom fuel is a
relatively more important issue. It appears to make sense
to entrepreneurs and policy-makers in China and India as
well, though some of their own people may be among
those currently suffering.
3. Speculators, having foreseen this, and wanting to get
their money out from the collapsing stock market bubble
in 2000 and 2001, and then from the collapsing real estate
bubble of the past two years, putting their money into
commodities and are perhaps now creating a commodity
bubble. In other words, prices are rising more and faster
than they would without speculator participation, and
might eventually come down again part of the way when
speculators sell to take their profits or, in the case of those
jumping in or out too late, their losses.
4. Money is losing value, partly due to efforts of banking
systems and governments to deal with the collapsing
real estate bubble. So speculators do not merely want to
get out of real estate; they want to get out of money. Prevailing
interest rates are now so low that even with the
moderate level of inflation expected, the actual rate of
return on many investments in the so-called “money market”
is expected to be negative. That is another reason now
to invest in real commodities instead.
5. Increased cooperation among members of OPEC, the
Organization of Petroleum Exporting Countries, since
1998 giving them more monopoly power in oil and gas.
Around the same time, a wave of consolidations in the private
sector, creating the hyphenated giants such as Exxon-
Mobil and BP-Amoco, has given those corporations more
power too. Unlike OPEC, the private firms seem to have
little direct influence on the price of crude oil, but they
can and do control refining capacity and hence have their
finger on the price of gasoline, diesel and other refined
products.
6. Increasingly tense competition for control of
resources. While for most of us it doesn’t matter if we pay
$130 per barrel to a US or British, Russian, Iranian, Nigerian,
Mexican or Chinese oil extracting company, it does
matter to those people worried about earning that money,
and worried too about the “national security” associated
with control of access to vital resources. They are in struggle
already and prepared to escalate. The costs of that
struggle, including for example the Iraq occupation, are
part of the resource price story.
In brief, market forces currently favor raw commodities,
military and police services, and perhaps innovative
entrepreneurship, at the expense of ordinary labor. Perhaps
too much inequality in ownership of resources leads
to too many people depending solely on labor for their
income; and so there is too much labor on the market, and
too many people badly making nearly useless things.