Commodity price falls suggest global slowdown and good news for China's inflation

After stability from December to March world commodity prices have started falling again – Figure 1. This indicates global economic softening but good news for China’s inflation and therefore increased possibilities for China’s economic policy to adopt an expansionary approach.

Figure 1

Looking at the trends in greater detail world commodity prices fell sharply during the second half of 2011. The year on year increase of the Dow Jones-UBS spot commodity index fell from a year on year increase of 46.4% in June 2011 to minus 7.8% in December 2011. However until mid-March 2012 no further fall occurred. As China’s consumer price index (CPI) is highly correlated with global commodity prices this raised the danger that inflationary pressures in China had ceased lessening.

However during the latter part of March and the beginning of April 2012 commodity prices resumed their year on year fall. By 5 April the Dow Jones-UBS spot commodity index was -12.9% below its level a year previously.

As commodity prices are an extremely sensitive and up to date indicator of global economic conditions two conclusions may be drawn from this.

• Global economic conditions may be softening – which would be in line with the latest unfavourable US jobs report for example.
• A decline in global commodity prices will significantly reduce inflationary pressures in China – creating more space for expansionary economic policies.

Because of the significance of such trends further development of world commodity prices must continue to be watched closely.

John Ross is currently Visiting Professor at Antai College of Economics and Management,Shanghai Jiao Tong University, where he leads research on globalisation and on China and the international financial crisis.
Check out his blog: http://ablog.typepad.com/keytrendsinglobalisation/ , or follow him on twitter @JohnRoss43

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