As many of you know, economists can not agree on the causes for inflation, so our series of ten inflation drivers covers several economic viewpoints about inflation

Infrastructure Demands Raw Materials

Commodity demand is rising faster than supply.  The demand for commodities in the developing world, to fuel infrastructure and manufacturing growth, is a much repeated theme of ours.  This is a simple macroeconomic observation.  Developing countries like China, India, and many others are consuming raw materials more rapidly than the supply of such materials is expanding.  When China wants to spend several trillion dollars to improve their railroads, roads, electrical grid, water, and other infrastructure, they require massive amounts of raw materials like coal, iron ore, copper, aluminum, nickel, zinc, oil, natural gas, cement, and many other materials.  Many of these materials must be imported, and when China or any other country goes into the global markets to purchase these materials, world supplies tighten.    It takes many years to build a new coal mine, iron ore mine, and nickel mine, etc.

Higher Standard of Living Demands More Agriculture Commodities

Further, when China, Russia, India and other countries’ economies grow, and they enjoy a rise in the price of the commodities that they export, their standard of living rises.  When people enjoy a rising standard of living, they tend to upgrade their diet and eat more expensive protein-rich meat.  If more meat is part of the diet program, the prices of grains used to feed animals will rise.  Growing meat protein is an inefficient use of grains.  Beef and mutton take about 8 pounds of grain to make one pound of meat protein, chicken requires about 3 pounds of grain to produce a pound of protein, and so on.

In summary, rapidly growing demand for commodities often creates supply dislocations for a few years until adequate supplies of the required product or a substitutable product can be developed.  This results in higher prices for the given commodity, until those new sources and supplies start producing.

Respectfully yours,

Monty Guild

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