What does inflation, deflation mean for commodities?

The effect on oil and industrial metals would probably be negative as deflation is associated with economic contraction and shrinking demand. Many analysts have revised downwards their expectations of the average oil price and most expect the market to rise only modestly next year.

But gold retains its status as a capital protection tool in times of financial uncertainty.

"The irony for gold is that people seem to buy it on inflation and deflation," Deutsche Bank analyst Michael Lewis said.

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He pointed to deflation in Japan, starting in the 1990s, as an example.

"What we saw there were concerns with the banking sector, very low nominal deposit rates and this actually increased gold imports into the country," Lewis said.

"So you could see retail and institutional money increasing demand for gold in that deflationary environment," he added.

AT WHAT POINT DOES THE OIL PRICE BECOME INFLATIONARY?

With oil prices locked in a range of roughly $70 to $85 for more than a year and the back end of the curve also range-bound, analysts say oil has for now no inflationary impact and no purpose as an inflation hedge.

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There is no magic number, but the concern during the bull-run that peaked with a record of nearly $150 a barrel for US crude in July 2008 was the speed of the oil price rise.

CAN INFLATION EXPECTATIONS HAVE A PSYCHOLOGICAL MARKET IMPACT?

The oil price's rises and falls within its range over the past year have largely coincided with market swings towards and away from risky assets, such as oil.

"Risk-seeking has coincided with economic optimism and when the market has been more optimistic, inflation expectations have been higher," said Mike Wittner of Societe Generale.

WHERE IS THE IMPACT STRONGEST?

Inflation is the exception compared with the norm of moderate price rises and the impact of commodity price rises is greatest in developing economies.

"Commodity prices generally are a large part of the CPI (Consumer Price Index) basket in emerging markets," said Richard Batty of Standard Life Investments.

"Developed economy wage rates are a much more important driver of inflation and inflation expectations than commodity prices as they exert a higher influence on the CPI basket, than say oil or food prices."

One reason, he said, was that oil intensity in an economy like Britain or the United States was around one third of what it was 25 years ago.

Economic models suggest that for each sustained $10 rise in the price of oil, Gross Domestic Product will contract by around 0.25 per cent in developed economies.

Any negative impact of rises in oil prices, and to a lesser extent of other commodities, on the economy is also offset by increased revenues for producer countries, which can lead to stronger global activity.

Consumers can still feel very sensitive to higher oil prices, especially in the United States, where they feed straight through to pump prices. In contrast, the impact for British drivers is masked by high taxes.

For those who take the long view, commodities will always be an inflation hedge and a portfolio diversifier.

"If you have a secular time-frame, then you expect commodities to provide better inflation hedging than other asset classes," said Robert Greer, executive vice president of PIMCO, one of the world's largest fund managers.

THE LINK BETWEEN CURRENCIES AND COMMODITIES AND INFLATION?

Since the global credit crunch erupted in 2007, advanced economies have sought to keep interest rates at ultra low levels and poured stimulus into their financial systems to fuel growth.

The combined effect has been to curb inflation in the near term, although some fear hyper-inflation could eventually be a consequence, and to depress some currencies, notably the US dollar.

As the main currency of commodity trade, a weak dollar can spur most raw materials higher because it makes them cheaper for non-dollar buyers. A weak dollar is particularly bullish for gold, often treated as a substitute currency.

For industrial metals and oil, it is more double-edged because although it can make the commodity relatively cheap it can also be associated with economic weakness in the world's biggest gasoline user the United States.

Adding another twist to the debate during the latest wave of economic stimulus, weak domestic currencies have been viewed as a way of being more competitive on world export markets.

The United States could be less worried about the potentially bullish impact on oil prices of a weak dollar, with potentially negative implications for the economy, because it has been tempered by the bearish impact of record high fuel inventories in the United States.

Analysts have commented a race to the forex bottom is under way, but the dollar would always retain a certain amount of safe-haven value as the world's reserve currency.

"One might get the impression at present that there is nothing better for a national economy than a depreciating currency," Commerzbank Corporates & Markets said in a note.

WHICH CURRENCY?

Commodity traders tend to look at the dollar against a basket of major currencies -- euro, yen, sterling, Canadian dollar, Swedish crown and Swiss franc.

In addition, oil traders follow the dollar/euro relationship, as much oil trade takes place in euros and the strength of the currencies of China and Japan, respectively the second and third biggest oil users after the United States, has a bearing on their spending power. China is also the biggest consumer of industrial metals.

The Bank of Japan shocked investors recently by spending an estimated $20 billion in a single day of yen-selling intervention and pointedly did not drain yen funds, leaving extra liquidity in the domestic banking system.

"The BoJ has already intervened, the Swiss National Bank does not exclude a renewed intervention and the US seems to be getting the upper hand against China regarding the appreciation of the renminbi against the dollar, i.e. the depreciation of the greenback," Commerzbank said.

For its part the Federal Reserve said on Tuesday it was ready to provide more support for the US economy and aired concerns about low inflation.

It laid the ground for pumping hundreds of billions of new dollars into the economy, although it made no policy shift and kept overnight interest rates near zero.

INFLATION BY STEALTH?

Although many analysts rule out significant inflation for the foreseeable future, some raw materials have surged in response to supply shocks.

European benchmark milling wheat gained more than 60 per cent in the five weeks to Aug. 5 in record volume trade as drought-hit Russia, the world's third-largest grain exporter, banned exports.

Benchmark US wheat and corn prices , already riding high because of tight markets for both commodities, stand to benefit further from the Federal Reserve's efforts to rekindle a healthy level of inflation in the US economy.

Grain stocks worldwide, however, are ample and this year's agricultural rally is unlikely to have the same impact on food supplies and prices as experienced two years ago.

The United Nations Food and Agriculture Organisation (FAO) has said price rises so far this year are not sufficient to trigger the global food inflation seen in 2007/08, which triggered violent protests in some countries.