Monday, January 31, 2011

Commodity Prices

I generally don't read Krugman much anymore. This post, on commodity prices, seems reasonable. Specifically, on food prices (which some have pointed to as evidence that QE has been inflationary):
this is straightforward supply and demand. Demand may be up to some
extent because of that emerging-market boom. But if you look at the FAO reports
it becomes clear that the key thing for cereals prices is that
production is down in advanced countries, largely owing to terrible
But if it were coming from monetary pressure, it would likely be a demand-side pull rather than a cost-side push. Also, it might be temporary, since it has to do with weather (unless it is also linked to longer-term climate change).

What about those gas prices? Tyler Cowen is saying that this time it is different, and that there will probably be a change in the long-term trend in energy prices in the coming years. (Note: the long term trend in real resource prices has been negative since about the start of the 20th century.) Yglesias largely agrees. The theory is that during previous increases in price, growth in demand was led by technological innovation, which made us richer, but also better able to pull stuff out of the earth. During current price increases, growth in demand has been led by countries catching up (China and India, for example), and therefore less likely to be accompanied by adjustments on both supply side (better extraction) and demand side (enhanced efficiency). 

They may be right, especially in the short and medium run, but I'm skeptical for a few reasons. First, we've heard the Malthusian trap story before, and it's turned out to be false each time so far. Second, I'm not entirely convinced that their history is spot-on; during previous spikes there was also considerable catch-up growth in Southeast Asia (in fact, the 60s and 70s are a textbook example of "catch-up" growth for countries like Japan, South Korea, and other "Asian Tigers"). Third, prices are incentives, and thus if there is a significant increase in the real price of resources, there is likely to be a supply-side adjustment of some sort, including a shift to new sources of energy (nuclear?). Policy will also play a role in incentives (carbon tax?).

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