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Financial Times: Stagflation fears as commodities post strongest gains since 1970s

By Javier Blas in Vienna
Published: March 3 2008 02:00 | Last updated: March 3 2008 02:00

Commodities prices posted their biggest monthly gains in February since the oil crisis of the 1970s and have enjoyed their strongest start to any year for half a century.

The gains have been fuelled by an explosion in popularity among investors seeking refuge from turmoil affecting equity and credit markets, and supported by strong demand from emerging markets, widespread supply disruptions and a growing interest in commodities as a hedge against rising inflation and the weakness of the US dollar.

However, record prices for energy and agricultural commodities are threatening to stoke global inflationary pressures just as US economic growth slows to a near standstill, prompting fears of a return to the “stagflation” conditions last seen in the 1970s.

The Reuters/Jefferies CRB spot index, a historic global benchmark that tracks the price of commodities such as crude oil, copper, corn and coffee, jumped 12 per cent in February, its biggest monthly rise since July 1974.

It gained 15.3 per cent during January and February, the strongest rise in any year since the index was created in 1956.

In spite of rising raw materials prices, Ben Bernanke, the US Federal Reserve chairman, has said he does not expect stagflation – the toxic combination of recession, high unemployment and rising inflation.

“I don’t think we’re anywhere near the situation that prevailed in the 1970s,” Mr Bernanke said. But he acknowledged that recent inflation figures, boosted by rising oil and food prices, were higher than expected.

Fears over rising inflation have led investors to pour record amounts of money into commodities. Some analysts worry the flows are inflating raw materials prices, thereby contributing to the inflationary pressures investors were seeking to hedge against.

Tobias Levkovich, Citigroup’s chief US strategist, warned commodities were looking like a “bubble prospect” as “easy money and speculative juices combine to drive prices unsustainably higher”. However, other analysts point out commodities in which speculators have little or no influence, such as iron ore, coal and rice, have also seen significant price rises this year.

The oil market is expected to remain volatile as Opec meets in Vienna to discuss production after West Texas intermediate surged on Friday.

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