Comflation – Commodity Price Inflation
Comflation is the sustained increase in the price level of commodities over time.
When prices rise, each unit of currency buys fewer units of commodities.
The word comflation (com-flation) is a hybrid of the words “commodity” and “inflation“.
A commodity can be defined as a raw material or primary agricultural product that can be bought and sold. An important characteristic of a commodity is their homogeneity. They are interchangeable with commodities of the same type e.g. one ounce of gold is the same as another ounce of gold.
One facet that all commodities share is that they are ultimately limited in the amounts that are available for consumption.
While the new supply of most commodities has not yet been exhausted, the amounts of commodities remaining unutilised falls year on year.
Hard commodities are items that are generally extracted from the earth by mining or some other process. They are often thought of as being raw materials. There is a fixed amount of each hard commodity available on the planet.
Although the amounts of commodities remaining available to use has not yet completely run out, for a number of commodities it is getting more difficult and more expensive year on year to produce.
Types Of Hard Commodities
There are a number of different types of commodities including metals, energy commodities and aggregates.
Metals are generally obtained by mining though increasing amounts are being generated through recycling scrap.
Soft commodities are generally agricultural items which are usually perishable after varying lengths of time.
Although soft commodities can be produced in increasing amounts, they generally require land and other inputs for this to happen, so cannot be produced without limits.
Examples of soft commodities
There is a large number of soft commodities including wheat, sugar, lean hogs, orange juice, coffee and cocoa.
Why Is Comflation Occurring ?
Comflation occurs because there is an ever increasing demand for commodities.
Although supplies of commodities have not yet been exhausted, they are reducing.
The available supplies of commodities are often harder to extract than they used to be which increases the cost of production.
Comflation is being caused by both demand and supply factors.
With the current massive expansion of population and wealth, particularly in China and India, the demand for commodities will continue to increase.
International Data Base
World Population: 1950-2050
World Population: 1950-2050
The graph above shows that world population is set to carry on growing into the forseeable future. In addition to this, there is also an expected increase in economic output. There will be a massively increasing demand for commodities in the years to come which will result in sustained comflation.
Comflation is here to stay and will be one of the world’s main economic issues over the coming decades.