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LONDON (Reuters) - Inflation threatens to supersede the credit crisis as investors' biggest enemy later this year as fears of a deep economic downturn recede and commodity prices show no signs of easing.
Many central banks, faced with the twin problem of the credit crisis and rising prices, have cut interest rates to ease the flow of credit, leaving inflation issues for tomorrow.
However, the relentless surge in resource prices from oil to rice and the resilience of emerging economies risks are turning inflation into the bigger worry for policymakers and asset markets.
"If the global economy has struggled out of the frying pan of the credit crunch, it seems destined to fall into the fire of high inflation ... High inflation is cruel to the owner of financial assets," said Tim Bond, head of global asset allocation at Barclays Capital.
AGRICULTURE: What is Really Causing ‘Agflation’?
The so-called "financialisation" of commodities markets, that is, the influx of investment funds seeking safer and more lucrative assets, has intensified the trend and "at the moment impinges more than the law of supply and demand," said analyst Fernando Muraro of AgRural, a consultancy firm in Brazil.
There is no way to measure the influence of speculative forces on "agflation," the new term coined to describe inflation provoked by the agricultural sector, he said.
But the role of speculation is undeniable, as commodities funds are involved in 40 percent of the futures and option contracts at the Chicago Stock Exchange, the highest proportion ever. Ten million tons of soybeans were bought in March 2007, compared to 21 million tons last month, Muraro pointed out to IPS.