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Katie Klingensmith

Higher commodity prices challenge inflation and growth

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5 minute read

There are many consequences of Russia’s invasion of Ukraine, the foremost of which are the tragic human toll and unfolding humanitarian crisis. Additionally, the military conflict and policy restrictions are disrupting an array of commodities sourced from the region, and many are expected to be in short supply. 

Russia, Ukraine, and Belarus together account for 11 per cent of global oil and 17 per cent of global natural gas, more than 10 per cent of global barley and wheat, and 20 per cent of global potash. They also are important sources of numerous metals, mining, and precious stones. The disruption to global—and especially European—supply chains is already being felt.

While many other factors could dictate the ultimate path of both prices and economic expansion, we look at the moves in key energy and food prices that could put upward pressure on global inflation and pose a challenge for economic growth.

  1. Energy and food prices have already shot up

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Oil, gas, wheat, and potash prices have all been on an upward trend for more than a year, with a recent sharp acceleration. Potash is a critical component of fertilizer and an important input into agricultural production; scarce or more expensive potash could put additional strain on food prices. 

  1. Higher energy prices were a big part of 2021 inflation

Inflation rose sharply across many regions of the globe in 2021, with the Organisation for Economic Co-operation and Development (OECD) recording 7.2 per cent annual consumer price inflation (CPI). Energy constituted more than 25 per cent of that increase among OECD countries last year. Food was a much smaller contributor. However, with grain prices as well as many commodity inputs higher, the potential for CPI to rise further in 2022, including from food, is top of mind.

  1. Rising commodity prices suggest higher headline inflation ahead

Brandywine Global’s calculations on various countries’ CPI basket composition suggest that for a 10 per cent increase in energy prices, headline CPI could rise from as little as 0.05 per cent to as high as 0.57 per cent, depending on each country’s energy use, source of their energy, price subsidies, and other factors. In addition, a 10 per cent increase in food prices could trigger an increase in CPI of as little as 0.09 per cent to as much as 1.26 per cent. As oil prices are approximately twice where they were a year ago, and wheat—as a main component of food—has increased nearly as much, the impact on CPI could be material. Some emerging markets may be disproportionately impacted by food prices because of the heavier weights of food in their CPI baskets.

  1. Historically, higher energy prices are a headwind for real GDP growth

While many different factors will influence the level of real economic expansion, historically higher oil prices have moved in the opposite direction as gross domestic product (GDP). In other words, when oil prices go higher, economic growth slows, and when oil prices ease, GDP reaccelerates. The recent increase in crude prices is expected to be a headwind for economic activity.

 

What are the risks?

Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility.

These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors

U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government.

Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

Katie Klingensmith, investment specialist at Brandywine Global, part of Franklin Templeton Group

Higher commodity prices challenge inflation and growth

There are many consequences of Russia’s invasion of Ukraine, the foremost of which are the tragic human toll and unfolding humanitarian crisis. Additionally, the military conflict and policy restrictions are disrupting an array of commodities sourced from the region, and many are expected to be in short supply. 

Katie Klingensmith
Katie Klingensmith
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Neil Griffiths

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily. 

Neil is also the host of the ifa show podcast.

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