Over the past decades, globalization has brought sleeping giants to the global goods and labor market. This, coupled with technological advances in commodity production, helped generate disinflationary pressures globally. However, the impressive growth of China and India is increasing demand for commodities at a rapid pace, making it difficult for technological advances to allow production to catch up with demand. This is creating inflationary pressures on commodity prices, making them more vulnerable to shocks and, hence, more volatile. In turn, policymakers face deeper challenges, as central banks of commodity-importing countries have to fight these imported inflationary pressures and respond to more volatile price fluctuations. Our analysis suggests that the historical demographic deflationary pressures from commodity prices and expanding labour supply may vanish, while inflationary pressure stemming from stronger demand for commodities may pick up. The persistent inflationary pressures from natural resource markets will require a relative price adjustment between the prices of commodities and other goods and services. The result will be imported inflation for most countries that rely on commodities either as inputs (such as oil and metals) or as consumption goods (such as food). The former would constitute a negative supply shock, increasing the costs of production and, ultimately, of final goods. The latter will increase the price of consumption goods directly. Overall, this would make the tasks of central banks more challenging. All else equal, in order to maintain an unchanged inflation target, monetary authorities would have to tighten monetary policy more than they would in the absence of such terms-of-trade shocks. This would depress economic growth and prices in the other sectors of the economy. The effect would not be limited to inflation. With excess supply running always thin, commodity prices would be subject to large fluctuations even for relatively small shocks. Weather changes, political instability in resource-rich countries, natural disasters, technical problems, disruption of production, may all turn out to continuously inflict large commodity price fluctuations. This would have severe repercussions on inflation volatility and on the economic activities employing commodities as key inputs, in addition to making it more difficult for policymakers to stabilize their economy. In the absence of compensating technological improvements, the constraint from limited natural resources may bite hard in the future. The very fast rate of growth in some large emerging markets would then support the Malthusian prediction across a broad spectrum of commodities. Clearly, development patterns and structural change in the global economy are moving at a sharp enough pace to necessitate some severe changes in relative prices, and most directly in the price of commodities relative to other goods and assets, in our view. Indeed, urbanization, a massive expansion in the size of the global middle classes and the rise of new economic superpowers and super-regions mean that some key commodities sit right on top of the most dynamic of the long-cycle fault-lines. It would be the equivalent of entering diminishing returns to scale at a global level because of the limited supply of key inputs of production: commodities. It may even soften the rate of the global economic expansion. Of course, the effects would be highly heterogeneous across countries, potentially exacerbating political tensions related to the control of commodity sourcing. In sum, commodity demand may increase faster than supply can catch up, with negative consequence for inflation, growth, and volatility. Malthus may turn out to be right, but with broader implications than he may have imagined. |
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