Higher commodity prices contribute to inflation fears

June 9, 2021

Commodity price increases are threatening global economic recovery, affecting vulnerable businesses and households and exacerbating fears that inflation could become more persistent, according to The Wall Street Journal.

Commodity price increases are across the board. Lumber, iron ore and copper have hit records; corn, soybeans and wheat have hit their highest levels in eight years; and oil recently reached a two-year high.

Economists and central bankers typically try not to be too concerned about commodity price moves because they can be volatile and make up a smaller part of consumer inflation than costs such as housing. However, manufacturers’ profit margins are shrinking because of higher costs for raw materials, and households are paying more for gas, groceries and some restaurant bills, which affects their ability to spend elsewhere. In poorer countries, some are going without basic needs.

Many factors are driving the increases, including strong consumer demand and supply-chain shortages. Many economists say it is a deliberate decision by policymakers in the U.S. and elsewhere to run their economies hot for now, with lots of stimulus, to ensure they recover fully from damage caused by the COVID-19 pandemic.

Central bankers must decide whether to move faster to cool demand through rate rises or other methods. During a similar situation in the 1970s, many countries gave priority to jobs and growth over controlling consumer prices during a series of oil shocks and experienced high inflation.

European Central Bank Chief Economist Philip Lane recently said high unemployment would help keep inflation under control because you need a strong labor market to get more persistent inflation.

Commodities mainly are used for producing goods as opposed to services, which are a bigger part of developed-world economies. Goods make up about 20% of the weighting of the U.S. consumer price index.

Academic work also suggests the effects of commodity-price shocks on inflation has fallen in recent decades as elements such as branding have become important in final costs. Additionally, commodities play a smaller role in final production as businesses become more efficient.

However, surging commodity prices also can be an early warning of future inflation because commodity markets react more rapidly to changes in the economy than prices for final goods. The effects of climbing oil prices already are showing up in consumer price data—figures for the eurozone showed consumer prices were 2% higher in May than a year earlier, the fastest rise since late 2018. In the U.S., it now costs an average of $1.02 a gallon more to fill up a gas tank than a year ago.

Economists note that some commodity prices, such as crude oil, are merely returning to pre-pandemic levels. Many also believe commodity price growth will subside later this year as some U.S. consumer spending shifts to services.

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