Many observers have noted the spike in food commodity prices, underpinned by interest in corn for ethanol in the US. There also appears to be a broader rise in prices of commodities which is bound to push up inflation. Last year the pressure on metal commodities from demand from China was observed. As the chart from Reserve Bank of Australia shows, commodity prices have spiked as prices for metals and food are now rising. Their index is at an all time high and the index chart for the past couple of years is vertiginous.
While central bankers and regulators scramble to be seen to do something about the stagnation of financial markets, I do not think that interest rate reductions are going to help. In fact they may exacerbate problems as they contribute to the moral hazard of investors believing there is no downside and contribute to the difficulty of ascertaining the balance of economic conditions because of unnecessary changes in monetary and fiscal policy.
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