Those who think gasoline and food prices are high now should brace themselves for what is coming, a leading commodities strategist warns.
“People may be surprised at how high prices can go,” predicts Colin Fenton, head of commodities research at JPMorgan Chase in New York.
Fenton, in Denver this week to talk to clients, said inflation is well underway in everyday items consumers buy, even if the Consumer Price Index reports a modest 2.2 percent rate.
As an example, he points to the little bags of chips that are a staple of sack lunches and sandwich shops.
From November 2001 to August 2007, they were stable in price, rising only a penny to 34 cents. They now cost 45 cents, with a 6 percent jump the past 12 months.
Gasoline prices are where consumers probably notice commodity volatility the most. But people need to fill their tanks to get to work, he said.
Consumers may reduce their song downloads from iTunes, the number of lattes they drink or their cable viewing, Fenton predicts. But they will keep buying gasoline.
Last August, Fenton and his team turned bullish on commodities; in January they issued a prescient warning that commodity markets had become too complacent about risk.
While he couldn’t have predicted the specific events that would push volatility higher — uprisings in the Middle East and a massive earthquake and tsunami in Japan — Fenton’s forecast soon panned out.
Rising food prices contributed to revolts in the Middle East, which have contributed to higher oil prices, which in turn have pushed food prices even higher.
Most revolts have occurred in countries where food purchases consume 35 percent or more of household budgets. Other countries most vulnerable to food inflation include Pakistan, India, Indonesia, Nigeria and the Philippines.
But the real force of higher commodity demand comes from growth in emerging economies, especially China, which is hungry for diesel.
Although U.S. consumers may grumble, the Chinese government is in a much stronger position financially to absorb price hikes. Fenton predicts oil will hover around $180 a barrel by 2016.
But not everyone is convinced that the strong demand out of China is sustainable.
“The hard landing suggested by weakening Chinese stocks would no doubt burst the global commodity bubble, including agricultural product prices,” leading deflationist A. Gary Shilling predicts.
A reversal in China would hit other emerging markets dependent on commodity exports, dampening demand globally.
But Fenton, who recently visited China, said that the country’s economy looks solid and demand for transportation fuel remains high.
“The story is diesel, the story is China,” he said.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
