The run-up in commodity prices prior to the onset of the current recession was strongly driven by the quick appreciation of the Yuan during that time. The 21% appreciation in the Yuan effectively made commodities–oil, metals, the basic needs of an exploding industrial economy–relatively cheaper for China. That in conjunction with rising incomes caused one of the most dramatic climb in demand for those commodities.
During the recession, that climb paused as China paused its currency’s appreciation and the global financial crisis sapped demand. However, as the world emerges from the current recession, demand will roar back to its previous levels. As a consequence, commodity prices will resume their rapid ascent.
In response to the resumption in growth globally, China will allow its currency to appreciate again, further pushing up demand, and hence prices, for commodities. It is clear that demand for ever-scarcer resources will not cease rising. Sharp rises in commodity prices will only push up the price level in industrial economies, especially those that have generously minted money to cope with the recession. Lower-income workers, especially those that depend on commodity-intensive industries (construction, energy, transportation, etc) will be hit the hardest by the double-whammy of the rise in costs of business, and the subsequent erosion of their purchasing power.
But the rise in commodity prices–like the sharp rise in the price of oil in early 2008–is not the only force pushing inflation. A rise in the cost of imports, which (again) the lower-income workers depend on, will lower the effective living standards. Not only will imports from China be more expensive, but also those from Malaysia, India, even goods produced domestically. China’s neighbors will undoubtedly let their currencies follow the Yuan as their fears of loss of competitiveness to China are mitigated. American producers, realizing that competition is less intense (higher import costs), will certainly raise prices to exploit the opportunity.
Clearly, America’s susceptibility to forces outside of its control demonstrate its loss of competitiveness. Potential consequences of changes in foreign demand for commodities and changes in exchange rates highlight its willful dependence on volatile inputs. America needs to demonstrate it has the political will to cope with the changing world.
Otherwise, rapid inflation is imminent. The trillions of dollars printed during the recession won’t help.