Commodity prices have risen as a
result of the global economy's post-pandemic recovery, which has been aided by
an abundance of financial liquidity and an aggressively expanding fiscal policy
in the main industrialized nations. Bloomberg's general commodities prices
index increased by more than 20% in the first 2 quarters of the year, primarily
due to an increase in energy prices (up 44.5%), which was followed by a less
dramatic but still significant increase in agricultural commodities (20.5%)
& industrial metals (17.6%).
The surge is caused by a
combination of supply-side reasons (decreased inventories), demand-side causes
(economic recovery, with an especially powerful comeback in industry), and
financial features. We ask ourselves the
following issues in the current environment, where an economic recovery
coexists with increasing inflationary pressures: How are costs of final
consumer items affected by the increase in commodity costs, and also what
impact has this has on emerging and developed countries?
The relative importance of the
energy and food component in the index of consumer prices is typically fairly
restrained in industrialized economies.
When determining the hidden
patterns in price in these economies, energy and food costs are typically
removed since their fluctuations are more irregular than those of the other
components. For the same reason, these variations often do not have a
significant impact on medium-term inflationary pressures, as evidenced by the
gradual increase in inflation expectations in recent months. Medium-term
inflation expectations have been anchored in part by legitimacy and
communications strategy of the monetary authorities in both areas.
Beyond the direct influence that
products have on the different CPI components, it's critical to consider any
possible side effects. As an illustration, a spike in oil prices has an impact on consumers' direct gasoline costs as
well as the production costs of businesses, which have an impact on the final
price of the products and services supplied. Therefore, it is important to
consider how the price of commodities affects the value added to final
consumption items and services. This contribution is minimal in industrialized
economies, varying between 4% - 8% , in part because the services sector
dominates their economic frameworks. Due to their more intensive use of
commodities in their consumption and production processes, the situation in
rising nations is very different. As a result, we see that emerging Asia, as opposed
to the euro region or the US, is more vulnerable to commodities prices.
Additionally, compared to
industrialized economies, emerging economies' consumer price indexes give
energy and food a higher relative weight. In particular, food contributes more
than 25% to the overall index in Brazil & Turkey, 36% in Russia, and 40% or
so in India. In other words, rising food prices have a greater impact on
headline inflation in emerging economies than they do in developed ones since
these nations are frequently more susceptible to food price rises.
The increase in agricultural
product prices that occurred during Q2 of this year, primarily for
maize, wheat, soy, and livestock, was attributed to temporary supply
constraints (like droughts, insect plagues, and farming practices), but it also
brought attention to how vulnerable many emerging nations are to food rising
prices and the dangers that could arise in the event of a measure includes
rally. On the one hand, the increase in inflation, and then in particular the
price of necessities, severely reduces the amount of disposable money that
consumers have in many of these nations.
Since the imbalances in the
supply of many of these commodities are temporary, their effects should subside
with time and shouldn't need significant changes in the monetary policies of
many rising nations. However, since the start of the year, one-third of
emerging nations (such like Turkey, Russia, Brazil, Hungary, and Poland) have
inflation rates that are higher than the inflation rate target set by their
central banks, and in many cases, these high rates are made worse than the
weakness of their exchange rates.
Agricultural, cattle, energy, and
metals are the four
main kinds of commodities that are typically utilized as raw materials to
produce food or other items. These groups work together to supply food, energy,
and raw materials for the production of goods for both consumers and
corporations. Particularly two of these categories have drawn attention and may
continue to do so as long as the Ukraine war persists.
Commodity price increases are
typically brought on by structural shifts in demand. The COVID-19 pandemic has
most recently caused these modifications. In particular, it has been brought on
by the robust rebound of global trade and industry following the end of the
pandemic's worst phase in early 2020.
Prices have also been impacted by
the time's reduced inventory levels from retailers and brands as well as the
results of the fiscal stimulus programmes implemented by each state. The
worldwide supply chain initially experienced considerable delays as a result of
this unprecedented circumstance. In the immediate wake, soaring commodity
prices started to occur virtually simultaneously. Last but not least, the start
of the war between Ukraine and Russia has made it harder to purchase and
transport goods, which has raised their costs. Energy, agricultural items, and
industrial metals have suffered the biggest price increases in recent years.
Despite the complexity of the problem, there are a number of recommendations
that retailers and brands can use to modify their pricing strategy.
The conflict between Ukraine and
Russia has had a huge influence on numerous international markets in addition
to the tragic loss of lives. Recent volatility in stocks and the quick rise in
the price of several commodities serve as examples of this, with the latter
hurting consumers while helping some producers.
If investors are considering
portfolio adjustments in an effort to profit from short-term price movement in
commodities like energy, they should proceed with care. As we've seen, price
increases can occur quickly, but price declines can also occur swiftly. This is
particularly true when a geopolitical incident is primarily to blame for the
sudden spike.
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