Basic material costs are now back at levels last seen a decade ago. The latest jump is largely the result of higher metal ore prices, which make up about 25 per cent of imported basic materials. Since basic material prices normally track commodity prices after a lag of a few months, it is reasonable to assume that they will continue rising.
Leo Doyle at Kleinwort Benson has devised an indicator of commodity prices which tries to correct for short- term speculative movements. 'Beneath the influence of US hedge funds, the underlying demand for commodities is stronger than is widely believed', he argues.
His indicator has reached levels last seen at the end of 1987, which he argues is consistent with growth in the world economy of 4 per cent or more a year. This suggests world growth and inflationary pressure may both be higher than most estimates suggest. If so, recent gloom on interest rate prospects may be more than justified.Reuse content