Macro Insights Weekly: Will commodity correction bail out the global economy?
- Already, gold and copper prices are lower than where they were a year ago
- Wheat and soybean price inflation rates are now in less than double-digit territory
- Oil has been in the USD80-90/barrel range in recent months, against USD120 seen in early summer
- Shipping costs have also come down sharply, helping movement of goods worldwide
- A still-strong USD however keeps inflation pass-through risks high for many countries
Commentary: As commodities and shipping correct, will the world get bailed out?
2022 began with global demand reviving from the pandemic doldrums, which pushed up the price of a wide range of commodities. From late February onward, prices of energy and food shot up due to the war in Ukraine. There was a great deal of fear as spring set in that stagflation was looming, with stubbornly high inflation even as consumer and investment sentiment would decline sharply.
Inflation worries have by no means dissipated, but some of the supply side drivers of inflation have ebbed somewhat in recent months. Waning demand in China has pushed down prices of metals, crude oil production boost by several countries to offset Russian oil and gas supply diversion has stabilised energy prices, while expedited exports from major food producers have had a softening impact on grain prices worldwide. Labour market tightness may have kept wages up even as monetary policy has moved into restrictive territory, but still, 2023 may well arrive with promises of significantly lower inflation than this year.
Already, gold and copper prices are lower than where they were a year ago, while wheat and soybean price inflation rates are now in less than double-digit territory. Oil has been in the USD80-90/barrel range in recent months, a far cry from the USD120 seen in early summer. Declining commodity prices reflect softening global demand and dissipation of the some of the supply side rigidities clouding the landscape earlier. Shipping costs have also come down sharply, helping movement of goods worldwide. As the world deals with higher interest rates, at least one comfort is inflation is not proving to be as stubborn as feared earlier.
There are two complicating factors in this context. First, with the USD up 15%+ this year, many countries will continue to experience local currency depreciation driven passthrough to inflation. Second, if the conflict in Ukraine takes a turn for the worse, energy and food prices could see spikes. But there is some resolve to address that issue, as seen in the record supply of LNG ships to Europe. The battle against inflation is turning a corner.
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