How commodity prices may affect inflation and the market from Price Vision's blog

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.