Goldman kind of disagrees with the Fed on commodities inflation | FT Alphaville

Goldman kind of disagrees with the Fed on commodities inflation

Well, this is something of a surprise.

Just after Federal Reserve chairman Ben Bernanke told reporters on Thursday that US QE (I and II) does not cause higher food prices in places such as Egypt, Goldman Sachs’ Michael Vaknin publishes a note suggesting something rather different.

Bernanke’s argument, by the way, is that increased commodities inflation in the emerging world reflects the growing wealth of EM populations and, in some countries, a failure to tackle inflation through their own monetary policy or by adjusting exchange rates.

But, over to Vaknin’s Friday note:

… Can we dismiss the risk of a persistent rally in commodity markets? After all, with the exception of the crisis period, commodity futures have persistently under-estimated the rally since 2002 (by roughly 20% each year in the case of WTI). This is quite striking because during the 80s and 90s commodity price shocks were clearly transitory and tended to mean-revert quite fast.

Our commodity team has maintained a structurally bullish view of commodity prices based on the view that investment in the infrastructure to supply commodities has not been adequate to keep pace with the growth in demand from the EM. This is once again – like in spring 2008 – setting the stage for commodity price spikes as demand must be rationed given the constrained supply.

The strong commodity bid from emerging markets is probably reinforced by the notion that central banks in many of these places are reluctant to normalise monetary policy. This is partly because higher policy tightening in the context of on-hold Fed and ECB rates would adversely lead to greater currency appreciation. The irony here is that by focusing on core inflation (whether explicitly or implicitly), the major central banks are ‘exporting’ looser monetary policy to EM, and as a result, they are being forced to ‘import’ back higher food and energy prices …

Something to think about as those awful January non-farm payroll numbers add further impetus to suspicions that we’re heading for QE3.

Related links:
The global inflation loop, a quick guide – FT Alphaville
Why QT, not QE, is the risk – FT Alphaville
Dick Bove on QE2 as a bank-less “financial war with China” – FT Alphaville