Is this global inflation thing over cooked?

A serious question, in our view, since predictions of Farmageddon (© Donald Coxe) are suddenly everywhere. But witness this chart, using data from the Economist, knocked up by Albert Edwards at Societe Generale:

That’s right - ex-oil, industrial commodity prices have gone precisely nowhere in the past two years.

As Edwards notes in a recent strategy note to SocGen clients, while many general commodities indices have risen some 30 per cent over the past year, the upward move is now very narrowly focused in food and energy. His contention - as controversial as ever:

As US consumption goes into recession, a decline in the US current account deficit will impart a global liquidity squeeze which will, in all likelihood, pop the food and energy bubbles.

Now, Edwards has been around a bit. He’s mindful of the fact that history is littered with examples of protests about food shortages and inflation turning into a fully fledged political protests and ultimately violent revolution:

Amid the mists of time we often forget that it is people’s stomachs rather than notions of political reform that are the catalyst for revolution.

But, while acknowledging the structural arguments underpinning the rise in commodity prices, the SocGen man wonders now whether cyclical market forces might already be saving the skins of the politicos:

I believe it has been the change in the US current account deficit that has been the liquidity pump for the global economy. It is turning and is set to turn even more quickly in the months ahead as the extremely import sensitive US consumer slides into recession. The flip-side of this is that Asian/EM surpluses will decline as exports slow, reducing the rate of FX intervention. This in turn will reduce Asian/EM domestic money supply growth, asset price inflation and hence Asian/EM economic activity still further…

…Until now, continued speculation in commodities was entirely understandable as investors needed to believe in a ‘growth’ story. As in all good bubbles there is truth in the structural bull arguments. I certainly believe them. But the impact of the cycle and liquidity is ignored at investors’ peril. That liquidity pump is about to be switched off. This will be the next round in “The Great Unwind” and will come in addition to the de-leveraging of the credit bubble we have seen to date. Market forces may yet do timid politicians work for them and send food (and energy) prices sharply lower.

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Extra - For those readers expecting some Albert Edward-ian pyrotechnical prose, relax…

The Socgen strategist on UK energy policy:

In the UK for example, PM Gordon Brown recently urged his fellow G7 members to address this issue of the impact of biofuel production on food prices. He wrote “rising food prices threaten to roll back progress we have made in recent years on development. For the first time in decades, the number of people facing hunger is growing”.

Indeed, he has just cancelled the UK’s biofuel subsidy of 20p per litre (the government pockets £550m in the process). How’s that for action? Pretty weird actually when you consider that at the same time the government have introduced the Renewable Transport Fuel Obligation (RTFO) which requires suppliers of fossil fuels to ensue a proportion – initially 2.5% and rising to 5% in 2010 – comes from biofuels. Oil companies will be fined for noncompliance. Call me cynical but methinks the UK’s biofuel policy may have more to do with raising money for the hard up Treasury! Bonkers. Bonkers. Bonkers with knobs on!