Of all the prices investors pore over as they tote up their gains and losses for 1998 and plan for this year, the price of pork is probably not high on many lists.
A primary assumption in the consensus 1999 investment outlook is that inflation -- from pork and crude oil to wages and salaries -- remains a nonissue, as it was last year. Much investment commentary centers on prospects for deflation, not inflation.
You don't have to be a doctrinaire contrarian to realize that an unexpected revival of inflation in the United States would alter dra- matically the terrain of 1999 investment assumptions.
"Last year was a terrible year across the commodity sectors," said Russell Read, manager of the Oppenheimer Real Assets fund, the only open-end mutual fund whose returns are tied directly to an index of 22 commodity prices -- not to stock or bond prices. His fund plunged 45 percent in 1998.
Mutual funds invested in shares of inflation-dependent natural resources companies fell an average of 24 percent last year; gold funds fell an average of 11 percent, according to Lipper Inc. By comparison, growth funds gained an average of 23 percent and technology funds jumped an average of 51 percent.
Belief in an inevitable resurgence of inflation, a deeply embedded fear among many investors, has been plainly wrong for several years. Yet there are many global forces at work -- economic and political -- toward releasing the inflation genie from the bottle.
All over the world, hardships caused by speculative excesses, economic mismanagement and the inevitable cycles in supply and demand would be fixed much more easily if prices of basic commodities began a sustained climb, threatening the benign inflation outlook.
The lure of higher prices is nowhere more obvious than among nations and corporations that produce oil and related energy products.
Oil supplies have been cut to meet reduced global demand, but persistent unsold inventories of oil have depressed prices, Read said.
Until about a month ago, producers saw no quick end to the inventory overhang and expected lower oil prices, he said. "If we didn't see the inventory trickle down, then you would have people say, 'Oil needs to be under $10 a barrel.' "
But oil-producing nations from Mexico to Russia have powerful reasons to generate higher oil prices, Read noted.
Forecasts of higher oil prices this year are based on the current blast of cold winter temperatures in the United States, new pressures by members of OPEC, the oil cartel, to enforce their own output cuts and signs of economic revival in South Korea and parts of Southeast Asia.
"The gloom has subsided," Read said. He cited corporate consolidations among producers, including the mergers of Exxon and Mobil and Amoco and British Petroleum, as well as activism by OPEC members, which could increase at a scheduled OPEC meeting in March. "Supply is being rationalized."
Among industrial-metals producers, last year's erosion of demand from Asia was "a knockout punch," Read said. The economic resurgence in Asia, outside Japan, that has helped stabilize oil prices and draw down oil inventories likely will have similar effects on demand for such primary metals as aluminum.
A rebound in gold depends to a great extent on plans by the central bank of Switzerland to divest its gold holdings and part of a restructuring of the Swiss national balance sheet to become less dependent on gold reserves, Read said.
"This is a big cloud over the market," he said.
The erosion of agricultural commodity prices in the United States represents the most direct and severe effect of the Asian financial crisis. Yet, important pressures are emerging for an upswing in livestock and grain prices.
Pressure to boost farm prices in America's heartland is as great as pressure to increase oil prices in Mexico.
New economic calamities in Asia and Brazil cannot be ruled out as impediments to higher commodity prices. But, so far, 1999 looks like a year for rebalancing world prices. This year, inflation may not be a nonissue for investors.
Pub Date: 1/24/99