Tuesday, March 22, 2011

Commodity Prices Are Spiking Because of Demand

According to some, the evil Wall Street speculators are behind the recent run-up in world commodity prices. However, as this chart shows, commodity prices and industrial production are nearly perfectly correlated. In addition, the middle class is growing, which means we're seeing an increase in demand for nearly everything such as

1.) Oil -- more people are driving cars
2.) Cattle -- more people want different food, such as beef
3.) Cotton -- more people want different clothes to wear
4.) Corn -- is increasing because of biofuels, the increased demand for beef (corn is fed to beef) and the increases in other grains, which typically trade in high correlation.
5.) Wheat is increasing because of constrained supply, which led to output quotas and then mass purchases to ensure adequate domestic supply.
6.) Copper is rising with industrial production

Hat Tip Mark Thoma