From farm to forecourt, prices are falling

YOU MAY have noticed, when you fill up your car, that the number 60.9 is starting to appear on the pumps. A few weeks ago it was 63 or 64 - more if you live in Inverness - and I guess in a few more weeks we will be seeing 59.9 or below.

This is the most visible sign of the plunge in all commodity prices, not just oil, that has taken place since the middle of last year. We notice the oil price because petrol is a product we buy the whole time, but the fall in metals has been just as dramatic. There has also been a less sharp, but still significant, fall in the price of agricultural products.

The three graphs on the left-hand side show the slightly different patterns of decline. The oil price came down in two jumps but is, in any case, more affected by things like the severity or otherwise of the winter and whether Iraq will resume significant oil sales than the overall trend in commodity prices. Metals fell off a cliff in the second half of last year, a move directly related to a collapse in demand from East Asia - the gold price (not shown) would have demonstrated an even more dramatic slump. Finally, agricultural products. Here a lot of different influences have been at work, from good wheat harvests to a fall in demand for beef in Europe. (Remember cattle are fed on grain products, so the fall there has reduced demand for grain worldwide.)

In one sense there is nothing new about this commodity slump, for there have been plenty of these before. Over the last 100 years commodity prices have fluctuated wildly, but the general trend of prices, in real terms, has been down (right-hand graph). So what we are seeing is a downward cyclical swing on a long-term downward trend.

For anyone interested in the environment, that graph on the right carries two powerful messages. One is that there is unlikely to be a generalised shortage of commodities in the foreseeable future, or at any rate there is no signal from the markets that this is likely. The other is that the price mechanism cannot fix the problem of excessive use of non-renewable commodities, in particular, fossil fuels; and if the market cannot solve the problem, there therefore will have to be other ways of curbing fossil fuel use.

So one could argue that the fall in commodity prices does in a way send the "wrong" signals: it will encourage us to use more energy than we otherwise would, and more generally to waste commodities. But if those signals are unhelpful, at least they are nothing new. In a more immediate sense, the fall of commodity prices is helpful and with the East Asian slowdown, it will be one of the dominant features of the world economy over the next year.

The impact is multi-layered, but the best starting point is to try and see whether the plunge will continue. The answer will, of course, vary for different commodities but the general direction will probably be downwards for most of this year, maybe longer. The reason is that world growth is going to be weak for some time. The present estimates are that the East Asian crisis will knock half a percentage point off growth in Europe and America this year, which might not seem a lot. But if you remember that East Asia has contributed about 60 per cent of world growth since 1990, a knock in that region has the most profound impact on demand for commodities. So the sensible working assumption should be that growth will be pretty weak for the next couple of years.

Weak commodity prices will be a powerful disinflationary force. Note: not a deflationary force, a disinflationary one. The distinction is important. We tend to run the two ideas together, but we should not, because falling commodity prices ought to have the effect of increasing demand. A fall in the petrol price encourages us to use the car for that extra journey, or maybe not worry so much about the fuel consumption of the 4x4 we were thinking of buying. Even if we don't use more petrol, if we spend less on fuel, we will have more money to spend on other things.

So a fall in commodity prices does not hit overall global demand; on the contrary it will tend to increase it.

It will however help push down inflation worldwide. First round effects are the fall in fuel and food prices, while second round will include lower pressure on the price of manufactured goods. The result of this is very clear. Lower world inflation will mean lower interest rates. While that may not directly translate into UK rates at the next Bank of England monetary committee meeting for there are lots of other influences there, it does increase the chance that rates will not need to move up. And I guess by the autumn we should start to see UK rates falling - that would probably happen anyway, but this increases the odds.

Next, there are a series of differential impacts on different countries. Most obviously, commodity producers are hit, while big commodity importers (like Japan) will benefit. Here within Europe the impact is fairly neutral for the UK as we are self-sufficient in oil, but big oil importers (Germany, France, Italy) will do better. For continental Europe as a whole, and for Japan, the fall in commodity prices helps offset the recent weakness of their currencies.

Europe, on the other hand, cannot easily take full advantage of the fall in world prices for agricultural products because of the system of protection. The fall puts more pressures on the system of farm subsidies, as it does German subsidies for the coal industry. But while it does not fully or quickly translate into lower food prices, it will, I think, have an important longer-term effect in undermining the European food subsidy arrangements.

This week the UK farmers have again been marching in London in protest at the fall of their incomes. Farmer friends in Scotland, non-political people you would never imaging joining a demo, have been picketing beef imports from Ireland. The message that they are seeking to get over is that they now accept that they will have to produce at world prices and adjust their operation to do so. But if they are going to have to do that, it must be on a level playing field - they cannot compete against the subsidies going to other nations. A sustained fall in world agricultural prices will surely increase the pressure for Europe to rethink the way it guarantees an adequate income for farmers.

That is just one example of the structural changes that are likely to come from a period of falling commodity prices, particularly if the period is prolonged. There are many others. Expect the fall in metals to increase the use of copper and (because of the fall in energy prices) aluminium. Expect nuclear power programmes to be under even more pressure from the fall in the cost of fossil fuels - quite soon we are going to be in a position where more nuclear plants in the world are being scrapped than being built. Just about everyone who runs a business will spot structural changes that may have an impact on their particular activities if the fall carries on.

Finally, I wonder whether falling commodity prices may take the edge off Anglo-Saxon (or, more properly, Anglo-Celtic) triumphalism. Out of the G7 countries, it is the US and Canada, and to lesser extent the UK, that are the main commodity producers. Australia is a big commodity producer too. We all have our tails up at the moment and with good reason. But while our relative success is not related to commodity price movements, a sustained fall in prices does level the playing field a little against us and towards continental Europe and Japan. It is not an enormous factor, but expect it to become more and more of a point to note in the months ahead.

Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

Sport
Mario Balotelli, Divock Origi, Loic Remy, Wilfried Bony and Karim Benzema
transfersBony, Benzema and the other transfer targets
Sport
Yaya Touré has defended his posturing over his future at Manchester City
Voices
Spectators photograph the Tour de France riders as they make their way through the Yorkshire countryside
voicesHoward Jacobson: Line the streets for a cycling race? You might just as well watch a swarm of wasps
PROMOTED VIDEO
Life and Style
lifeHere's one answer to an inquisitive Reddit user's question
News
peopleDave Legeno, the actor who played werewolf Fenrir Greyback in the Harry Potter films, has died
News
Detail of the dress made entirely of loom bands
news
Life and Style
beauty
Sport
There were mass celebrations across Argentina as the country's national team reached their first World Cup final for 24 years
transfersOne of the men to suffer cardiac arrest was 16 years old
Arts and Entertainment
Armando Iannucci, the creator of 'The Thick of It' says he has
tvArmando Iannucci to concentrate on US show Veep
Sport
German supporters (left) and Argentina fans
world cup 2014Final gives England fans a choice between to old enemies
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
A mugshot of Ian Watkins released by South Wales Police following his guilty pleas
peopleBandmates open up about abuse
Sport
Basketball superstar LeBron James gets into his stride for the Cleveland Cavaliers
sportNBA superstar announces decision to return to Cleveland Cavaliers
Sport
Javier Mascherano of Argentina tackles Arjen Robben of the Netherlands as he attempts a shot
world cup 2014
Sport
Four ski officials in Slovenia have been suspended following allegations of results rigging
sportFour Slovenian officials suspended after allegations they helped violinist get slalom place
News
14 March 2011: George Clooney testifies before the Senate Foreign Relations Committee during a hearing titled 'Sudan and South Sudan: Independence and Insecurity.' Clooney is co-founder of the Satellite Sentinel Project which uses private satellites to collect evidence of crimes against civilian populations in Sudan
people
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

Network Engineer (CCNA, CCNP, Linux, OSPF, BGP, Multicast, WAN)

£40000 per annum: Harrington Starr: Network Engineer (CCNA, CCNP, Linux, OSPF,...

Day In a Page

A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice