The Weather Conspires To Boost Inflation

Tropical Cyclone Yasi has strengthened to a Category 5, which means it is among the most powerful storms to ever hit Australia. It is, by most measures, the greatest storm to make landfall in any major populated area in the world during the last several decades. The mines in the regions which have been shuttered because of floods in Queensland will be closed longer than expected. The amount of zinc and coal from the area is important to supply throughout Asia, an area where inflation has already begun to burn through purchasing power and the cost of exports.

The mines in Australia and the ability of ships to dock on the coast could be impaired for months.

Storms across the northern part of the Western Hemisphere and near record low temperatures are forecast to remain until the end of winter. The need for heating oil is likely to stay remarkably high. It can be conceded that people will drive less and perhaps use less gasoline. Crops as far south as Florida could be severely damaged, which would raise the price of agricultural commodities. Thus, two forces are at work. The crippled agricultural industry is likely to trump gasoline consumption. Cars and trucks can only stay off the roads for so long.

The Morgan Stanley global PMI measure has already signaled that inflation is built in to most commodities as metals and agricultural goods near all-time highs. Manufacturing is still strong in places like China. Demand there may abate, but not soon enough to undercut inflation which already part of the system.

The world economy could grind to a halt and inflation could disappear. But, GDP improvement does not decelerate that fast particularly without a credits crisis and a massive period of deleveraging. The weather elements will help raise prices. The worldwide economy will continue its minor boom for at least a few more quarters. Momentum is built into the recovery. The forces against it which include sovereign paper problems are unlikely to be enough to cause a new crash.

Forecasts of what would happen to global growth and global prices did not have the weather built into them. It is a flaw which means snow and wind were neglected.

Douglas A. McIntyre