China Clamps Down

As the global economy slowly climbs out of the recession of the last two years, many give credit to China for its role in generating growth. China has been rapidly transforming from an agricultural society into one of the world's leading industrial nations. While China once exported raw materials to other nations, they now are the world's largest consumer of energy and the largest importer of copper, platinum, soybeans, cotton, and many other commodities. China's voracious hunger for raw materials has been the main force behind the recent run-up in commodity prices.

China has begun to feel growing pains, as inflation recently hit a 2-year high. The impact of inflation has been felt especially in foods, as prices are up 10%, with some staples like rice and cooking oil doubling in price over the last two months. In response to the rampant inflation, China announced three measures this week that could put the brakes on their economy; they raised interest rates, limited banks' ability to loan money, and even threatened to arrest individuals for hoarding commodities.

China's clamp down on inflation caused a sell-off in global commodities this week, especially crude oil (-5%), cotton (-10%), and soybeans (-4%). Despite the Chinese intervention, analysts still believe that Chinese growth will continue to be a major factor driving the global economy and higher commodity prices.

Consumers in the United States have yet to feel a pinch at the grocery store like that of Chinese consumers, but that may change soon. Large food producers and stores have been subsidizing food costs through promotions, a practice that is being slowly eliminated. Additionally, this year's sharply higher corn, soybean, cattle and hog prices have yet to fully trickle down the food chain, according to USDA projections that U.S. food prices could rise moderately in 2011, up 2-3%.