Normally predicting economic changes remains a task best left to the foolish. This year I am giving it a go. The following are some of my thoughts on where we are now on the economic road and the main threats that lie ahead.
1. Oil, hard and soft commodity prices will continue to rise
As we enter 2011 somehow it seems that the metaphysical fog that blinds us from seeing the future clearly is darker, thicker and the winds of fear stronger and colder. Central to this deteriorating outlook is accelerating commodity inflation.
Over the last six months a barrel of Brent has risen 27% from $74 to $94. Copper and lead have put on nearly 50% during the same period, zinc is up 40%, silver 65%, wheat is 50%, Soybeans 60% and cotton was up an astonishing 70%. The price charts for all of these commodities are parallel and undeniable. These charts indicate that the increases are neither small nor temporary and that the trends will continue to march on upwards throughout 2011.
These increases cast a massive shadow over current official Western inflation rates which are between 2% and 4%. While these increases have been building, the commentating and political worlds have been relatively sanguine on the threats they pose. Temporary extreme weather events can be blamed for some of these recent rises but there is little doubt that constricted supply and accelerating demand from, in particular, BRIC countries are driving prices skywards.
2. Central banks will raise interest rates
The impact of these inflation tsunamis will not only be felt at the pump and the checkout counter, they will also threaten to reverse 2010’s investment returns.
These rises will also pose unpalatable conundrums for Central Banks and Governments. In the UK, the BoE will probably choose to face the Chancellor’s music in stony silence for as long as it can, while hoping that the inflation tsunamis were caused by one off events and will soon will recede. Eventually, the BoE’s MPC will succumb to the reality of accelerating commodity inflation and launch its only anti-inflation weapon - rate rises. These actions will have little positive effect because this bout of inflation, like various strains of flu, started life in far off lands.
3. Faced with increasing inflation, increasing risk aversion and the threat of sovereign debt haircuts bond prices will plunge
The bottom of the interest rate…
