The commodities - stagflation link...

There is growing consensus that the broad based commodity price rise is here to stay at least for a while. This is mainly because of growing demand coming from emerging markets. The rise in prices is having a material wealth distribution impact on the economies of emerging and developed countries. Commodity rich emerging market economies are benefitting tremendously from the price hikes which is also fueling their appetite, whilst for those of most if not all developed markets, the impact is similar to a tax effect as the commodity price increase is almost entirely passed on to the consumer.
Another less obvious effect of this long term rise in prices is the potential it has of triggering a much dreaded stragflationary environment. This is mainly because developed market economies have already entered a period of weak growth/recession at a time where "headline" inflation remains clearly above the target of central banks. In theory, the longer inflationary pressures persist, the greater the risk that they have an impact on the future expectations of inflation, which in some instances, can eventually lead to an inflationary spiral. Once a spiral sets in, it becomes very difficult to control. Although we may be far away from such a scenario, the effect of a long term rise in commodity prices should not be underestimated.