A sharp drop in commodity prices is raising hopes that inflation is peaking in many parts of the developing world, especially in Asia, providing welcome relief for the fragile global economy.

Lofty prices for oil, food and other essentials remain a big challenge, especially for poor developing countries such as Haiti, Egypt and India, where earlier this year soaring costs triggered violent street protests, transport strikes and other unrest.
But recently, many of those prices have fallen significantly. Oil fell $1.24 a barrel on Friday to close at $113.77, 22 percent below its record price earlier this year. Rice, a staple for the developing world, is down about 40 percent since May, while palm oil, a source of cooking oil, is down a similar amount since peaking in March. Wheat, copper and a host of other commodities also have seen sizable drops.
With economic growth slowing across the world, including in China, and demand for raw materials easing, many analysts believe it is unlikely the commodity-market highs of earlier this year will be tested again soon. That is an important change for developing nations, whose industrial economies are often far more commodity-intensive than the U.S. and Europe, and where inflation rates are heavily influenced by the direction of commodity prices.
Economists caution that volatile commodity prices could easily rise again, especially if fresh geopolitical problems or unforeseen weather disasters emerge to drive them higher. Even if prices don’t rebound, they are still dramatically higher than a year or two ago, meaning continued hardships for many poor consumers. At its current price, rice is still nearly twice as expensive as in 2007.
But the downturn in prices for many commodities marks a sharp change from earlier this year, when inflation seemed to be spiraling out of control, especially in China and other parts of Asia, leading to fears of “stagflation” -- a dangerous phenomenon in which growth is sluggish but prices keep rising.
Now, there is an emerging consensus that rising inflation is “gone, it’s over,” at least in Asia, says Tim Condon, an economist at ING in Singapore. If the trend holds, it means less pressure on central-bank governors to raise interest rates -- a move that would have slowed economic growth further. Lower commodity prices also mean lower import bills for developing countries and smaller outlays for subsidies to shield consumers from expensive food and fuel. Less-pricey oil and metals are also good news for corporate profits.
The recent drop in commodity prices is “an unambiguous positive” for the world, “especially in the developing countries,” says Nancy Birdsall, president of the Center for Global Development, a think tank in Washington.
There are, of course, some countries that stand to lose from lower commodity prices, especially if the current slide turns into a rout. In Malaysia, as much as 40 percent of the government’s revenue is now coming from sales of oil and gas, analysts estimate, compared with about 10 percent a decade ago. The government is spending its windfall on bridges, health care and other areas.
Some Latin American countries are vulnerable, too. Observers are especially worried about Argentina and Venezuela. Argentina’s debt load has crept up to about 55 percent of gross domestic product, and the country’s populist president is using windfalls from soy and other exports to fund a spending spree.
But unlike past commodity booms, many producers have managed their windfalls well this time, economists say, setting aside large portions of the profits for future use. And in many cases, analysts say, commodity prices appear to be moving to levels that preserve big profits for producers even as they ease inflationary pressures.
China -- the most important developing economy -- already has seen dividends from lower commodity prices. After topping out at 8.7 percent in February, annual inflation there has fallen to 6.3 percent, and is likely to come down further.
That is because a large part of the country’s inflation was driven by a single problem: a shortage of pork, which now is being corrected. Farmers cut back on pig populations after 2006 because of temporary low prices, and a subsequent outbreak of pig disease further reduced stocks.
Chinese officials offered vaccinations and insurance programs to encourage farmers to restock. Now, supplies are picking up again. After surging 70 percent in the 12 months to the end of February, pork prices are down roughly 7 percent since then, said investment bank CLSA, based in Hong Kong.
Although some economists worry about other sources of inflation in China, the turnaround has allowed policy makers to do more to support growth. The government recently raised limits on bank lending and has increased its spending on infrastructure, steps that would have been difficult if inflation was still accelerating.
In Thailand, where officials recently raised interest rates and unveiled expensive new subsidies, including free bus and train fares, Finance Minister Surapong Suebwonglee said Friday that inflation is now expected to start falling from October as lower oil prices filter through. Thailand’s central-bank governor, Tarisa Watanagase, said Friday that “monetary policy doesn’t have to be tightened” further, thanks in part to lower oil prices.
In Brazil, where the central bank is raising rates to stem 6.4 percent inflation, some officials such as Finance Minister Guido Mantega now say the “worst is over” for inflation and are clamoring to reverse the policy.
Lower rates of inflation in the developing world could help the U.S., which recently reported that consumer prices rose 5.6 percent in July from a year earlier -- the biggest increase in 17 years -- partly because of higher prices for food, energy and apparel goods. Reduced price pressures abroad could help keep imported costs from growing further.
A drop in commodity-led inflation won’t solve the financial- and housing-market problems that weigh on the U.S. and other developed economies, though. And inflation remains stubbornly high in Vietnam, Singapore, Malaysia and other emerging markets, in some cases reaching the highest levels in a quarter-century.
Some analysts fear price pressures will continue to lurk even if oil and other commodity prices fall further, as past increases work their way through the system. Airlines including Thai Airways have sought to offset higher fuel costs through surcharges and service cuts, hoping oil prices would fall further. If they don’t, airlines could be compelled to make surcharges permanent or impose new ones.
“There’s still an issue about how fast inflation comes down, and I suspect it won’t be fast,” says Sim Moh Siong, an economist at Citigroup in Singapore.
International food agencies aren’t declaring victory either. “The experts tell us the era of cheap food is still over for the foreseeable future,” says Jennifer Parmelee, a spokeswoman for the United Nations’ World Food Program, which says the cost of its programs to feed poor people has swelled to nearly $6 billion this year compared with about $3 billion in normal years.
Still, downward moves in rice, oil and other necessities have been significant. After rising to a record $1,100 per metric ton several months ago, the price of rice has since fallen to about $600 to $700. As a result, the panic that gripped the market earlier this year has disappeared, says Vichai Sriprasert, president of Thai exporter Riceland International. He says customers that bought extra supplies a few months ago in anticipation of further price increases and supply shortages are now sitting on excess stocks and curbing purchases.
“Everybody thinks prices will keep going down,” he says, though he stresses they probably won’t go back to anywhere near their lows of a year or more ago.
(Source: WSJ)