With the CRB index rising to within just 1% of its high of 2009, the
implied inflation rate in the 10 yr TIPS has broken out to the highest
level since Sept 30th at 1.575%. On Tuesday, Bernanke said that he
expects inflation to be quite contained over the next couple of years
while at the same time expecting the economy to start growing by year
end. This goldilocks forecast sounds great but if he’s correct and the
economy does stop contracting by Q4, it’s hard to believe that commodity
prices will remain tame at the same time. Commodity producers over the
past year have responded aggressively to the massive demand destruction
seen and have underinvested in response and its not that easy to just
ramp up again at a quick pace. It is also for this reason on the supply
side, that if commodity demand just stops going down, prices should
rise.
