Rising commodity prices, as currently, present opportunities for substantial profits, from investing directly in commodities themselves or from buying the shares of those companies involved in producing them. But there are also grounds for hoping that things don’t go too far.

The fact that the governor of the Bank of England attributed the dramatic rise in UK inflation almost solely to the rise in global commodity prices in his letter to the chancellor following the publication of May’s inflation figures is an indication of the effect that this boom is having on global economic activity.

Of course, it is not all bad news. The main UK market indices are actually in positive territory this year, thanks to the gains in the oil and mining sectors, which now account for some 30 per cent of the UK market’s value. However, relying solely on these sectors to keep us out of trouble is as dangerous as backing the ‘new paradigm’ stocks of technology, media and telecoms at the beginning of this decade.

Praying for stability
But there are even more fundamental reasons for wanting the commodity markets to stabilise. In the main, they represent the things that are essential to economic activity, if not to sustain human life itself. For while the oil price rise has caused difficulties for many, culminating in industrial strife across Europe, it is what is happening to agricultural commodities that could be even more damaging.

In the debate about whether history repeats itself or not, one of the most persuasive arguments in favour of the premise is that, no matter what period you are looking at, basic human needs remain the same, and the most basic of all is for food and water. From Roman emperors keeping their citizens happy with ‘bread and circuses’ to the French Revolution, which was triggered by a sharp rise in the price of bread, and beyond, governments have known that sharp increases in basic foodstuffs spell political trouble.

And this is exactly what is happening in the current climate. I recently received
a report on the global economic outlook from Peter Lucas, global strategist at investment management house Ashburton, in which he argued that ‘High food and energy inflation is arguably the biggest cloud hanging over the markets today. It is generating social tensions, sapping consumers’ spending power and is creating considerable uncertainty regarding the outlook for interest rates.’

Lucas made the point that the biggest impact is being felt in Asia, which, given that it is seen as the engine of global growth in the coming decades, is something that should concern us all. More intriguingly, he also said, ‘Our base case has been that Asia would fight inflation with currency revaluations. With hindsight we should have qualified that position.’

The point that Lucas was making was that he anticipated that the governments of the region would act like rational economic beings and do what was most likely to combat inflation. However, what most chose to do instead was learn from the historical lesson that most examples of violent ‘regime change’ follow sharp rises in food prices and introduce subsidies and price controls on these items.

Market distortion
Such actions may seem baffling to economists – Lucas points out that they ‘do nothing to address the underlying problem, indeed they prevent the price mechanism from working, and are a huge drain on the public purse’ – but make eminent sense to politicians, particularly those who have a sense of history.

The problem is that they don’t do much for the long-term health of the global economy. The immediate crisis seems to be receding, but it is a problem that is bound to return as a growing global population puts more pressure on its food resources. And you can bet that when the next food price crisis hits, politicians will remember the fate of Marie Antionette and react in the time honoured way.