While we are witnessing more inflationary pressure these days, some economists are not so much worried about the upside trend of the price levels. James Saft, a Reuters columnist, puts it this way, “Never mind inflation, the powerful and long-lasting effects of the credit crisis will rein it in soon enough”. Soon enough, the market bust will suppress the inflationary pressure and even bring in disinflationary trend when the immediate impact of the credit crunch begins to subside.
If Saft’s gloomy forecast actualized, it would bring severe downward pressure to the world economy. And ominously, it is highly probable that a prolonged slide in economic growth will dominate the market trend at least within 2008.
However, I have some reservation on whether the slowing down economy will really bring down the inflationary pressure. Albeit so true that the money contraction will go on for a period of time, it is uncertain whether the contraction will lead to wholesale slides in commodity prices. For commodities like oil and metals, which the demands are growing supported by the emerging economies, prices are strongly lifted and supported. The fundamental demands underpinned the investors’ confidence in these commodities and become more than just havens for capitals fleeing from the financials, but also a new profit generator for the fund managers struggling to keep their jobs. Even the money contraction prolongs and deflationary pressure emerges in other parts of the global economy, the prices of these commodities would be among the most steadfast against the downward trend.
The money created in the boom will vanish the way it was created, but not totally. Fraction of that created money will retreat from the dwindling market to more lucrative ones. More importantly, the lower geared investors’ maneuvering power is less affected in the credit crunch. Shifting of weightings in the portfolios from financials to commodities and utilities has already been going on and is likely to continue for a while. The too much money chasing too few goods phenomenon is likely to be seen in the oil and metals markets.
While the demand for oil and metals is inelastic, the rising commodity prices simultaneously fuelled by the users and investors are likely to bring inflationary pressure to the economies at large.
The period for cheap money, high growth rate and low inflation is going to end. We are entering a new chapter and obscurely on the cover page it reads “stagflation”.