A rush of investors into commodities to hedge against inflation is adding to inflationary pressures by driving up consumer prices. The move by funds and other speculators away from equities and bonds as inflation rises and the dollar weakens has sent many commodities to record peaks - in turn driving up prices for US consumers already bruised by wider economic problems.
"In their attempt to protect themselves against higher inflation, people must buy underlying commodities, but these are also the commodities that tend to be the bedrock of common life - fuel and food," said Peter Beutel, president of Cameron Hanover.
"It is one more place for (investors) to park their money so that it doesn't deteriorate as the Fed merrily drops interest rates to fight one problem and create another." Speculators have bulked up open interest on crude and refined products over the past few weeks as US crude oil surged to all-time highs of over $100 a barrel. Minneapolis spring wheat, prized by bakers for its high-protein that makes for quality flour, traded up to $25 a bushel this week, almost four times higher than a year ago.
US gold futures have jumped more than 30 percent from year-ago levels to near $970 an ounce. Platinum has shot 60 percent in six months to more than $2,100 an ounce. The rise of speculative cash in commodities is feeding back into inflation, however, by driving up prices further. "(The commodities investment) is feeding inflation. It's kind of like a self-fulfilling prophecy," said Rob Kurzatkowski, a futures analyst at optionsXpress.
The surge in prices, especially energy, helped lead to a 1 percent jump in US producer prices for January, the biggest 12-month gain in more than 26 years. The Federal Reserve has already slashed its benchmark rate by 2.25 percentage points since September to the current 3 percent in an aggressive effort to spare the economy from the worst effects of a deep housing slump and credit squeeze.
Fed Vice Chairman Donald Kohn on Tuesday said a weakened US economy was a bigger worry than higher inflation, suggesting a willingness to lower interest rates further, which could stoke inflation higher still.
Economic pressure has also come from the weak dollar, as the euro climbed on Wednesday to a record high of $1.51 against the US currency. "The weak dollar stokes inflation and really causes a lot of these commodities to rally," said Kurzatkowski. Some analysts argue that oil market fundamentals do not support the current $100 price as economic problems are hurting US oil demand growth, and blame the speculative surge for much of oil's record rally.
"Based on what we know from the fundamentals, it certainly would make more sense that you would be buying this as an inflation hedge," said Stephen Schork, president of The Schork Report. "The futures market is being used as an inflation hedge rather than just a market that physical players go to lay off their risk."