Cotton, Oil, Rice Prices a Harbinger for Deflation!

I was reading the G&M this weekend and was perturbed again about the poor understanding and reporting of price inflation. The front page stories in the ROB discus how rising cotton prices are causing food inflation. Ok it does follow that farmers who want to capture the historically high prices of cotton and rice will plant less corn, soy, and wheat. What the article doesn't discuss are the reasons behind the cotton price increase to begin with. Was it some one off fungal blight of this years crop? Or will next year we see a cotton price collapse barring some new cotton t-shirt fad? One real cause of food price inflation over long periods of civilization are population pressures much as we're seeing now in the burgeoning and much talked about emerging nations. Once inflationary fires start, you get positive feedback loops that magnify the misallocations of resources and set the loop into bubble type dynamics. Just like during the initial stages of the housing boom that was fueled by low interest rates, bubble dynamics are hard to pick out as the psychology overtakes the fundamentals.

One other cause for the rush into commodities is the so-called inflation trade because of the real or anticipated increase in the monetary base. QE1, and 2 have done wonders for just about every asset class. This has been true for Ag and this has been especially true for oil as the
Globe reporter points out that this will eventually lead to inflation. I have a problem with this simplistic understanding of inflation and it's causes. Without getting into a long dissertation regarding Monetarism and Austrian economics, let's agree that if the monetary base was held relatively stable, the price increase (some would call this inflation)of oil is inherently deflationary. Simple really: more $ spent on oil and its many derivatives, the less $ for other things. $100 per barrel oil is a deflationary brake on the economy despite Bernanke's disingenious academic sound bytes about trying to "anchor higher inflationary expectations". It's when the monetary authorities increase the monetary base for whatever reason, you start to get price levitation (I'm avoiding the I word)in commodities first.
Eventually because oil and other commodities are used in the production of other products, you will get price inflation in those goods too, followed by wage inflation etc.
I suspect that we'll not see wage inflation like in the 70's because of the current global wage arbitrage and also because we'll have a stagflationary collapse before then.

So how long does this inflationary wave last? Like I said before, it's hard to see through these psychological ponzi dynamics, but as long as quantitative easing is official policy, the fuel is still burning and you want to ride the wave as it catches and explodes. Be careful what you wish for Mr. Fed Chairman.