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Hooray, Commodity Prices Are Sinking! Now Man the Lifeboats

Federal Reserve Chairman Ben Bernanke has taken a pounding in recent months from inflation hawks screeching about the run-up in commodity prices. Oops. The price of oil, grains, metals and other commodities is suddenly in free-fall.

Crude this week fell the most it has in a year, diving more than 10 percent on Thursday alone. Silver is plunging. Corn, too, is falling. Cocoa, down. Sugar, down. Wheat, down. Overall, a key commodities index shows a more than six percent dip over the last week.

Consumers are understandably worried about rising gas and food prices. But maybe, just, maybe Bernanke was correct in predicting that the sharp increase in commodity prices was temporary. Writes Douglas McIntyre over at DailyFinance:

Many economists had been assuming that discretionary consumer spending in the U.S. would be undermined by the sharp rise in food and clothing prices. That appears less likely now with commodities prices heading back down. Those declines are should prove to be good news for the American economy, and even better news for the American shopper.
Slow boat to China
Well, yes and no. Certainly one reason commodities are retreating is that there was a bubble, and now speculators are bailing. Pop. Investors have been expecting the air to come out of the sector for weeks. It was just a question of when. As McIntyre notes, that should ease the pain at the supermarket check-out and the gas pump. Indeed, economic forecasting firm IHS Insight expects the cost of oil to flatten out this year at about $104 a barrel, which should cut gas prices significantly from their current levels. That's the good news.

The bad news is that commodity prices are also sinking because of growing conviction that the economy -- not just in the U.S., but globally -- is slowing down. Not only did first-quarter GDP drop significantly here in in the states, but China and India are also tapping the brakes, with the latter recently moving to raise interest rates. The Fed's confirmation last week that it would end its policy of injecting money into the economy through "quantitative easing" is also raising growth concerns.

Smell the fear
The job market doesn't look so hot, either. The Labor Department is expected to announce tomorrow that hiring in April slowed from previous months. Fear is in air, both in the markets and on the ground in the "real" economy. Said one investment analyst:

"The economic outlook is looking more challenging," said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $84 billion in assets. "People have been crowding into stocks and commodities, but with the additional slowdown in the U.S. and the more difficult employment situation, there's suddenly more uncertainty."
Of course, even market "corrections" reverse course. Just because oil takes a breather for a month or two doesn't mean that it won't spike if another Arab government falls. But if we needed another sign that inflation isn't public enemy No. 1 right now -- that would be unemployment -- then this week's nosedive in commodity prices is it.

Image from Flickr user Medill DC
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