Rise in inflation coming as rates remain low, BarCap predicts

Inflation is set to rise in late 2009 and 2010, driven by rising commodity prices and low central bank rates, according to research from Barclays Capital, released on June 25.

"There are dollar inflation worries going forward because of US monetary and fiscal policies," commented David Woo, the bank's head of foreign exchange strategy. July 2009 was likely to see inflation bottom out worldwide, followed by an increase largely driven by rising commodity prices, especially crude oil. With the slack labour market meaning wages will remain low, service inflation was unlikely to be significant, Woo said.

US unemployment continues to rise, with 15,000 new claimants this week, bringing the total this year to 627,000, according to the US Department of Labor. Earlier this month, a Congressional oversight panel suggested the Treasury had underestimated the severity of the recession, with unemployment already at 9.4%, ahead of the "adverse scenario" used for stress tests earlier this year.

UK inflation, however, was seen as less of a risk. The Bank of England's explicit inflation target, and its greater independence, meant it was more likely to raise interest rates to control inflation than the Federal Reserve, Woo thought. The Fed was unlikely to raise rates substantially before the second quarter of 2011, he added.

Commodities research head Paul Horsnell noted that despite growing interest in the sector from hedge funds and other institutional investors, he was confident the commodity boom was mainly driven by fundamentals rather than by speculation. "There has been a pickup in investor interest in commodities - there are a lot more hedge funds with a net long position, and a lot of pension funds moving across from other asset classes... but it would be wrong to thinkit's solely investor driven - the fundamentals are also important," he remarked.

Horsnell cited production cuts - especially by the Opec oil cartel and other base metal producers - and growing demand as the main reasons for the commodity bull market.

See also: US Congress: Banks may need more stress tests