KUALA LUMPUR: Amid hopes of a gradual economic recovery, rising oil and other commodity prices buoyed by a weakening US dollar have heightened concerns that inflationary pressures could be creeping back into the picture.

Commodities such as crude oil, crude palm oil (CPO), soybean and metals have been on the uptrend since early this year while the dollar started declining in March.

“Inflationary pressures will be back in the picture, of course, with the rise in commodity and consequently paper money.

“The economic recovery will increase demand for food, commodities and petrol. The rise in commodity prices will cause food prices to increase. All these will spur inflationary pressures,” Manokaran Mottain, senior economist at AmInvestment Bank, told The Edge Financial Daily.

However, Manokaran said inflation was not a threat at the moment as most countries would see low or negative inflation this year.

“But next year, we will see positive inflationary rate. It will likely spike in the second half of 2010. We will see a surge because of the recovery that is taking place now. But it would still be a manageable rate,” he added.

As at 8.30pm last Friday, oil stood at US$71.58 (RM250.53) per barrel, up 54.46% year-to-date. CPO closed at RM2,340 a tonne, up RM15 for the day. Gold, seen as a hedge against inflation and a weakening greenback, has gained 9.4% year-to-date to US$962 per ounce.

Copper spot price reached its peak this year at US$6,194.25 on Aug 5 but eased to US$6,017.50 the next day on the London Metal Exchange. Aluminium spot closed at US$1,961.25 on Aug 6.

“The commodity market is very speculative at the moment. People are expecting economies to be in an expansionary mode because of the recovery and so it pushes up demand. But economic numbers are still low. The worst may be over for the region but it is not necessarily on a rising trend for now,” Manokaran said.

Meanwhile, TA Securities head of research Kaladher Govindan said there was pricing pressure in a global reflationary environment.

“Inflationary prices were already there before the collapse in commodity prices, but not right now. There is pricing pressure around the world. The inflation rate in Malaysia is expected to be at 1% in six to 12 months,” he said.

Kaladher concurred that more serious inflation in Malaysia would occur in the second half of next year, with the rate expected to rise to 2%. “With stronger signs of growth, the momentum will rise in the second half of next year and then inflation will occur,” he said.

He added that the dollar would continue to weaken, perhaps due to quantitative easing and higher supply of money that would erode its value.

The dollar strengthened in the second half of last year as it was seen as a safe haven amid the collapse of the global economy. The greenback peaked at 3.7280 against the ringgit last March. As of 8.30pm last Friday, it was at 3.5005.

Manokaran said the weakening of the US dollar was mainly due to outflow of investments into emerging markets as there were still worries about the strength of the recovery in the US.

“However, emerging currencies remain very volatile despite the inflow of investments. So the dollar may strengthen towards the end of the year which will again affect the rise in commodity,” Manokaran said.

Contrary to the recent bullish stance on commodities, ECMLibra’s head of research Ching Weng Jin did not see the recent rise in commodity prices as a rally.

“I don’t think this is a rally, because we are coming from low levels. If crude oil is going to US$100 per barrel and CPO is RM3,000 a tonne, then maybe it is a rally. I think the pricing now is fair. It will not rise further,” Ching said.

Although there were several factors driving the commodity uptrend such as stockpiling in China and a weaker dollar, Ching said there were neither the corresponding forecasts for demand nor fundamental reasons for the prices to go higher.

“The prices will adjust, and there will be corrections,” he said.

He said crude oil would remain at between US$60 and US$80 a barrel while CPO would trade between RM2,200 and RM2,600 for the next few months to a year.

Ching also said the current rise in commodity prices would not affect recovery despite the higher cost of production.

“The rise in commodity prices does not directly impact economic recovery so much, but if it rises too high, then the government may refuse to subsidise these commodities, and that’s where inflation will set in.

“In terms of inflation, we are coming off from a high base. Right now it is still manageable, at around 2% to 2.5% based on current commodity prices,” Ching said.