Something important happened yesterday, whilst UK politicians were preoccupied with arguments over marginal changes to Council budgets. Commodity prices experienced sharp falls. Silver is down by around one third in a few days, and oil fell 10% in a day. Metals and agricultural commodities have also weakened.
These price falls will take some of the inflationary pressure out of the world economy. They are both bad news and good news. The bad news is they show that markets fear the world economy will slow again. The ending of US money printing next month, allied with the monetary squeezes the emerging market countries have had to impose to tackle dollar led inflation, are very likely to lead to slower growth in 20112. The US economy may be strong in the second half of 2011 on the back of this year’s printed dollars and tax cuts, but may slow next year. China, India and the rest should slow next year as their higher interest rates and bank controls have their impact.
So what is the good news? The good news is that inflation should come down. This could start to relieve the squeeze on real incomes in the UK and elsewhere. It could also mean that China and other leading emerging economies could be closer to ending their monetary squeeze, as the impact of higher food and commodity prices on their own inflation starts to abate.