ASSESSING THE INFLATION THREAT : Wet Soybeans Don’t Add Up to Inflation

The best thing you can do about all the inflation talk that’s disturbing stock and bond markets right now is keep your head and be skeptical of all the warnings about rising prices.

The Commodity Research Bureau index, which tracks 21 commodities, jumped sharply on Tuesday to its highest level in more than 2 1/2 years. This sent stock prices tumbling and bond interest rates gyrating.

The markets’ anxiety was understandable. A renewal of inflation would bring higher mortgage rates and the collapse of President Clinton’s economic program, which is based on expectations of low interest rates spurring businesses to eventually expand and hire more employees.

But if you look at the reasons behind Tuesday’s rise in the CRB index, you’ll find the numbers less than convincing. The big push came from soybean futures prices rising as commodity dealers reacted to terrible floods along the Mississippi River, especially in Iowa.

But even if the floods’ final effect on the massive U.S. soybean crop were known--which it is not--a one-year, flood-driven crop damage is simply not the kind of chronic inflation that financial markets really worry about.

That’s probably why short-term interest rates--for Treasury bills and overnight loans between banks--reacted sharply Tuesday, jumping upward and then retreating. Long-term rates--on seven-to 10-year and longer bonds--stayed about the same.

After soybeans, the other elements of Tuesday’s inflation scare are less reliable as indicators. Precious metals prices rose again, as they have been doing since March. The Chinese are buying gold as a hedge against their own high inflation, traders explained as the metal hit $392 an ounce--up 20% since March 10.

Well, yes, no doubt Chinese workers and farmers with cash in their hands for the first time in decades are buying gold and silver and even jade--the traditional Chinese object of value. But what has that to do with price inflation for industry and consumers in the United States and around the world?

The basic industrial commodities, such as copper, are not rising in price. In fact, the Economist magazine’s index of industrial commodities, measured in all the world’s major currencies, is now skirting a record low.

Other, traditional yardsticks of commodity inflation are weak. The price of oil is fluctuating at about $18 a barrel, down from about $20 earlier this year.

And the price of coffee jumped Tuesday on the news that Colombia, Brazil and five other Latin American coffee producers are forming a cartel to limit exports and try to keep the coffee price high. But years of living with OPEC (the Organization of Petroleum Exporting Countries) has taught us that cartels result only in some producers cheating--shipping extra supplies to market. Look for coffee prices to drop.

Anyhow, it should come as no surprise that inflation is dormant while business the world over is in the doldrums.

Japan and the major industrial countries of Europe are in recession, and the U.S. economy’s recovery from recession seems halting and uncertain.

A better question than the outlook for inflation right now is why are the markets so nervous? The answer could be as familiar as the daily front-page headlines: malaise in the world and lack of leadership.

The great industrial nations are finding it difficult to cope with the aftermath of the Cold War. Western Europe, after being protected more than 40 years by the U.S. military and its own common market, is finding adaptation to the global economy troubling.

European countries followed a pattern of providing good jobs for some and supporting jobless citizens through social benefits financed with high taxes. Now those countries find their own citizens balking at paying higher taxes while refugees flood in from the former Soviet bloc to take advantage of those social benefits. The result is confusion.

Japan built its gigantic economy on exports to prosperous North America and under the protection of the U.S. military. It is finding it difficult to change.

And the United States built prosperity on a large defense effort and a world view that protected other nations from communist aggression. Now it too is finding it difficult to develop post-defense industries.

And so we see the spectacle of a summit, opening today in Tokyo, in which all the participating nations concede they have little hope of any results.

President Clinton has even called for another summit, to follow this one, in which officials of the leading countries would discuss job creation.

But the real answer to the post-Cold War world economy is that costs built up over 40 years of the defense era have to adjust--and they are doing so.

Prices of machines and factories, of buildings and of labor are coming down--or at least not rising. The trend is to deflation, not inflation, and that is why long-term interest rates remain low.

At some point those lower interest rates will allow new businesses to form, new growth to begin. Traders in the markets know that, and that is why they have recently bid up stock prices to such high levels.

But the confused talk of jobs summits worries them, and that is why they reacted so negatively Tuesday.

Commodities vs. Bonds

Prices of some key commodities have surged this year, which usually heralds higher inflation. But the bond market doesn’t seem to believe it: Long-term interest rates have continued to fall, providing bond mutual fund investors with positive returns. FIRST-HALF ’93 RETURNS (By percentage) Silver: +39.0% Sugar: +27.8% Soybeans: +23.6% Gold: +17.9% Corn: +11.0% Avg. U.S. govt. bond fund: +6.6% Oil: -6.2% Wheat: -11.6% Copper: -15.8%

Commodity price changes are through Tuesday.

Source: Lipper Analytical Services; commodity exchanges