Last time I wrote about commodities and economic growth, I got some good comments that are worth expanding on a bit. In particular, there is the question of the potentially positive consequences of a decrease in commodity prices, which otherwise are problematic for countries that are highly dependent upon them.
- As commodity prices drop, so will inflationary pressures. Chile might be experiencing that now. Across the region, inflation is not high by historical standards but has been going up.
- Lower inflation and lower commodity prices may also reduce the price of food. We're not seeing that yet, and let's hope global warming does not counteract the benefits.
- Commodity booms often entail currency appreciation (check out Brazil and Chile in this graph). If that is reversed then other exports can become more competitive. Currencies do seem to be slipping, but the $100,000 question is whether industrial exports will make up for the loss of revenue from commodities.