Economics is no doubt a complex subject, more so for people not having a formal degree in Economics. True, they also say that ten Economists would have eleven opinions on one single issue.  

The headlines hit us all the while, over TV, morning papers, online. And we see various reports on economic growth rates, inflation rates, consumer spending, financial markets, and what not.  

For some time, what’s also hitting us is the rise in prices in commodities - of most types. Crude oil quadrupled over last 4-5 years, and now trading over $100/barrel after hovering around the magic three digit number for months. And it’s a question of time, not in years but probably in months or even in days when gold hits the magic four digit number per ounce.  

Other base metals, iron, iron ore, coal…copper…you think of any particular commodity; and they all have had a similar run. Lately agri-commodities have joined that club as corn, wheat and others have been hitting high prices all too often; and in many cases the jump in prices have been nothing less than 100% over the last year or two.  

When consumers buy end-products that’s made of any of the above commodities, they essentially pay the extra costs as profit for corporate world has not come down as a result of rising input costs (and productivity may not have improved so much either). So essentially, end consumers bear the rise in costs from their wallets. 

True, there have been many studies that showed how our global economy now is more immune to any energy (read crude) price shocks. Compared to the 1980s, when the world had its first oil shock, energy prices as a % of consumers’ wallet now stands much lower in the US. Studies showed them to be around 6% now, creeping up from 4% a few years ago before oil started shooting up but way down from 9% from the early-1980s. Food again as another class comprises 9% of consumers’ wallet (UK-based study) now; so economists feel that rising food prices won’t drastically impact inflation. 

But if one takes only these two class of products, where prices may have already gone up (compared to 2-3 years back, say) by 100% or would soon reach that figure sooner or later if the present trend continues; it would mean consumers paying 100% more for 15% of their consumption itself. For the balance 85% consumption, prices again may have gone up (can go down also, but unlikely; more so for coming days as cheap productions in China also has its limits. And when services comrpise a major part of economy and consumption; other than electronics, telecom, computer or Internet, there hardly is any area where prices have fallen. The service providers also pay their employees, and that costs have also gone up) to a certain extent.  

So the non-economists like me wondered often how many major economies kept on reporting low single-digit inflations. Or think about Japan, a country that imports most raw materials, shipping freight was up in same line as commodity prices; but still showed price deflation continuously for years. The trend reversed only very recently, surprising when yen appreciated thereby reducing import bills and thereby helping contain inflations. There was deflation mostly when yen depreciated from 110s to 120s against the dollar, prompting its Central Bank to have no interest rate or the lowest possible interest rate for years.  

We read about GDP growth rates and various types of inflation rates often.  However most of us have no idea on how they are measured. Contrary to that, we see the prices of these commodities flashing all over without any difficulties in understanding how they are measured as we realize that even more when we buy goods made from those commodities.  

The question that at times therefore hits us is on the reliability of the inflation data. Various types and their various interpretations are even more perplexing. Say, if producers price inflation (PPI, one released lately) went up by 7% or more in the US over the last year, that cost must have been passed on to the consumers (otherwise the firms took a hit on their margins). Are we missing something as ordinary consumers and readers, or is there a magic wand that our ‘economic machine’ has which takes high-priced inputs but produces low-priced goods, none (manufacturers, government) taking any direct hit from it. Conspiracy schools used this opportunity since long as they propagated the idea of ‘stealth inflation’, which, as per them,  may be running at double digit numbers.  

Lately, the specter of inflation has started haunting global economies. However the core, non-volatile inflation in leading economies still remains less than 3-4%. That’s a surprising achievement when oil is at $100, and gold nearing $1000 (gold primarily being a hedge against inflation). And other commodities and agri-commodities are also following crude or gold. True, there always is the lead-lag factor; and rising commodity prices may not yet have percolated to the consumer level fully. But then the Japanese deflation paradox that lasted even till 2007 – how does one explain that with the commodities boom? 

Economics is a matter of confidence. Financial markets, fiat money, bonds, other monetary instruments or financial instruments, asset prices including homes – all exchange hands with that confidence being there. Credit market problems hitting parts of the biggest economy is not due to a shortage of credit, but due to a shortage of the confidence. And that’s why rate cuts have not helped solving the credit market problems as of now.  

So non-economists like me are not suggesting anything, rather stating our confusions on understanding the inflation numbers coming particularly from Japan and the US. When oil is at $100+/barrel, gold nearing at $1000/t-oz, agri-commodities doubling their prices within years – how can inflation be still in low single digits? Even if inflation was low against all odds so long  due to productivity growths and/or for the China-factor, would inflation remain low going forward as well against more odds?

My head remains silent acknowledging my ignorance in this area, mt heart says ‘probably no’.

Ranjit is an Associate Professor at Indian Institute of Foreign Trade, and is the author of the book Wondering Man, Money & Go(l)d. Opinion is personal.

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