Will Commodity Prices Pass Through to the Core?.

By Michael S. Derby

Surging commodity prices have economists debating whether the gains will kick off an inflation surge, create new obstacles for the modest U.S. recovery or generate a noxious combination of both.

For now, many forecasters remain confident the U.S. will be able to withstand a storm that’s bedeviling other economies. They believe the nation will continue forward with its modestly paced recovery, with inflation rising only gradually. This sentiment is shared by Federal Reserve policymakers who are pressing forward with their aggressive campaign of bond buying, as they try to goose inflation a bit higher and bring down unemployment.

And yet, there’s plenty of reason to worry. A recent research piece from Credit Suisse said “the common global concern of the moment is commodity price inflation.”

Rising food, energy and raw material costs are problematic on several fronts. They can feed into core inflation and drive up underlying price trends. Commodity-based gains can also create drag on growth, because for many companies and firms, the cost of things like energy is unavoidable. Money spent there is money that can’t be spent on other things, so the higher the cost of something like oil gets — futures prices for Brent crude oil cracked $100 a barrel Monday — the less spending power remains available for things like car purchases or home electronics, and so on.

A number of recent U.S. manufacturing reports show factory operators have been getting jammed by higher costs for a while. And it goes beyond factory operators. Monday morning’s release of the closely watched Institute for Supply Management-Chicago, which polls manufacturers and service sector firms, showed rising overall activity joined the broadest increase in what firms paid for raw materials since July 2008.

Surging oil prices are particularly worrisome. University of California San Diego economist James Hamilton observed on his blog “every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession.” .. [..]

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