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| ECONOMIC FORECASTING SURVEY | ||
Bubble Isn't Price Driver, Poll Says
See Fundamentals
Behind High Costs
May 9, 2008
The global surge in food and energy prices is being driven primarily by fundamental market conditions, rather than an investment bubble, say the majority of economists in the latest Wall Street Journal forecasting survey.
Fifty-one percent of the respondents said demand from China and India was the prime factor in soaring energy prices, and 41% said the demand was the chief contributor to rising food costs. Constraint in supply was cited second most often; 20% blamed supply problems for higher food prices, and 15% for increasing energy prices.
"It's a combination of demand and supply issues," said Joseph Carson of AllianceBernstein LP.
Although most of the analysts attributed the food and energy costs to fundamental trends, 11% of the economists see a potential bubble driven by speculation. "Commodity markets have become a strange safe haven, with prices well out of line with underlying market fundamentals," said Diane Swonk of Mesirow Financial Holdings Inc. "I am dumbfounded that a report like [the May 2] employment report triggered a rally in oil prices. ... Just plain ridiculous."
The Labor Department's report showed a slight drop in the unemployment rate to 5%, and a smaller-than-expected decline of 20,000 in payrolls. Crude prices rose 3.4%.
The survey, conducted May 2-6, showed that the 53 respondents, on average, expect the price of crude to fall to about $105 by the end of next month and to about $93 by the end of the year. (Crude settled at $123.69 Thursday on the New York Mercantile Exchange.) Their expectations for overall inflation continue to rise. They expect the consumer-price index, which rose 4% year-to-year in March, to increase 3.6% in June from a year earlier.
Gasoline prices are expected to stay high -- an average price of $3.45 a gallon over the next 12 months. The average price was $3.46 a gallon last month.
Despite concerns about rising prices, the majority of respondents -- 60% -- said the Federal Reserve is showing enough concern about inflation, and that its focus on the risks to growth is the right priority. The Fed has cut its key interest rate by 3.25 percentage points since last fall but recently signaled that it intends to pause.
"Worry about inflation after we're sure this isn't a depression," said David Wyss of Standard & Poor's Corp. Thirty-six percent of the economists think the credit crisis is over or mostly over, while 62% say it is about half-finished.
Other economists expect inflation to moderate as the economy slows. "The recession will cure inflation, without Fed help," said Ethan Harris of Lehman Brothers Holdings Inc. The forecasters expect second-quarter gross domestic product to increase 0.2% at an annual rate, and to expand less than 2% until the second quarter of next year.
However, a sizable minority -- 40% -- said the Fed isn't concerned enough about inflation. Some of the analysts aren't convinced that a slowdown will tame inflation. "The U.S. isn't nearly as big a part of demand for oil and food as it was years ago," said Allen Sinai of Decision Economics Inc. "We'd need to see a global downturn to tame inflation."
On average, the economists expect the Fed's federal-funds rate, the rate at which banks lend one another money overnight, to remain at 2% for the rest of this year.
Write to Phil Izzo at philip.izzo@wsj.com
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