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Consumer price inflation is coming - just look at commodities

How stimulus measures to support the global economic recovery can lead to consumer price inflation

William Peters
March 2, 2021

Following a year of COVID-induced global turmoil, the focus has shifted to vaccinations, the lifting of lockdown restrictions and economic recovery. But investors should also look out for hidden inflation and higher prices, which are lurking on the horizon. Should these rise too quickly, central bankers could look to raise rates.

Our series of charts below show how measures to stabilise the global economy have led to rising commodity prices – and the knock-on effect that will have on the price of goods for consumers.

Central banks and governments around the world have pumped an unprecedented amount of liquidity into the global economy to alleviate market fears and financial tightening during the pandemic. And the stimulus is set to continue, with Federal Reserve Chairman Jerome Powell pledging to keep up growth policies such as large-scale bond buying to mitigate against an uneven recovery.

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You can see the impact this is having on the commodities market. When interest rates fall, commodity prices rise – and our chart showing one-year returns for industrial commodities illustrates the extent of this reflation since the pandemic took hold globally in March 2020.

The fastest rising is tin, with soybeans and copper not far behind. Still playing catch-up are the energy indices – crude, natural gas and heating oils, all of which were damaged by the catastrophic collapse in demand. Looking forward, there are reasons to be bullish on oil, copper and agricultural products such as livestock.

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The price of crude – which fluctuates on supply and demand – has also started recovering after the global economic contraction drove the West Texas Intermediate, the benchmark price for US crude oil, into negative territory for the first time in history in April 2020.

That, along with global COVID restrictions, prompted a sharp drop in the number of active international rigs, as our data from Baker Hughes shows. With economies beginning to re-open, low oil supplies could provoke a huge price spike if rigs do not resume full operations in time. We haven’t seen such a lack of supply since the 1973 oil embargo, when prices jumped by 300%. (Macrobond users can download the charts to see the full history.)

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Copper is also soaring thanks to Chinese manufacturing and construction. Our chart shows how the annual change in construction investment rose to a record last year, pulling copper prices up to an eight-year high. But policymakers may begin reducing investment in fixed assets as the Chinese economy, one of the few that expanded during the pandemic, goes from strength to strength.

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A key concern for much of the world will be rising food prices. Diammonium phosphate, a plant fertiliser, and soybeans, which are used to feed livestock, have both become more expensive in the last 12 months. This will soon lead to price rises for beef, exacerbated by growing global demand for meat as populations grow and become wealthier.

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All these rising commodity prices have yet to translate to higher costs for consumers, but it’s only a matter of time. As our final chart shows, the price of transport and food in the US has already started creeping up again.

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