Alan Greenspan has always kept a close eye on steel. As a private economist, he thought the price of scrap steel a good indicator of the level of activity in the US economy. He stuck with this view when he became chairman of the Fed, telling the American Iron and Steel Institute in 1997 that "every day I still look for the price of heavy metal steel scrap".
So what, one wonders, does he make of it today? Since the middle of last year the price of scrap metal around the world has more than doubled (it's used to make new steel in America's cost-efficient electric arc furnaces). The price of most finished steel products has soared too.
On the old Greenspan model, this would mean the US economy running at full steam. But it doesn't mean that now. Today it isn't so much demand from US factories that is forcing the price of steel up, but China's famously insatiable appetite for base metals: some US producers say that they are now exporting 40% more scrap to China than they were a year ago (see sector of the week on page 8). And it isn't just steel. Every base metal from nickel to copper has soared over the last few years. So has the price of every soft commodity under the sun - from oil to cotton and soybeans. Indeed, even coffee, which the market had pretty much given up for dead, is making something of a comeback (see charting it on page 30).
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Greenspan has noticed these rising prices: threats of deflation, he said this week, "are no longer with us". But inflation is (and not just in the US - see politics and economics on page 23). In America in March, consumer prices rose 0.5%, suggesting an annual rate of 6%. This came as a massive surprise to the world's economists (it was double their estimates), so one can only imagine that they hadn't been keeping much of an eye on commodity prices. There is no way that the prices of all basic materials can rise this much without those rises feeding through into consumer prices - note that steel, for example, is used to produce everything from trucks to tumble dryers. Six percent may well be just the beginning.
Mr. Greenspan should still be keeping an eye on scrap-steel prices, but rather than seeing the surge as good reason to pat himself on the back for his splendid management of the US economy, he should see it as an unfortunate but inevitable consequence of rampant global reflation and the rise of China. Today, rising scrap prices are an indication not of a brand new US boom, but of the return of inflation.
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