Commodity crash signals disinflation is taking hold for now
FROM copper to wheat to natural gas, the cost of some of the world’s most important products is crashing, bringing longawaited relief for consumers that were stung by last year’s soaring prices.
The commodity crunch unleashed by Russia’s invasion of Ukraine has taken a sharp reversal, with a Bloomberg gauge dropping more than 10 percent since the start of the year to the lowest since 2021. Driving the disinflationary trend are a world economy flirting with recession, Europe’s industrial slump and China’s weaker-than-expected emergence from Covid Zero policies.
For households and businesses, the benefits are already starting to show up as headline inflation rates fall, taking some pressure off central banks to keep aggressively raising borrowing costs. Even so, some prices are proving more sticky, and there’s uncertainty over how long-lasting the disinflationary pressures will be, limiting the extent that this will ease the cost-of-living squeeze.
“The drop in commodity prices seems to reflect the stuttering rebound of China, a looming US recession and supply side destruction in Europe,” said Carsten Brzeski, global head of macro at ING. “It’s indeed possible that inflation could turn into temporary disinflation.”
Energy prices have been at the forefront of this year’s commodities plunge, particularly in Europe, where natural gas futures have tumbled by about two thirds this year after shooting to records last summer.
Even oil and its derivatives have gotten cheaper, despite an agreement by producing countries to curb crude output. Diesel prices in the United States have fallen more than 30 percent from their 2022 peak, providing relief for truckers, farmers and consumers in the world’s largest economy.
In Spain, inflation slowed more than anticipated in May as fuel costs fell and the growth in food prices eased. Euro-area price growth, due to be published Thursday, is also expected to have cooled sharply.
The big question is how much further those rates will weaken before leveling off. Even if raw material costs fall, other inputs, particularly wages, may be far slower to follow.
But for now, input prices appear to be largely heading downward. On top of that, the supply-chain disruptions that hit large parts of the global economy have also started to ease, and container freight rates have collapsed.
In China, a fading post-covid rebound is capping price pressures on metals. Nickel has plunged 30 percent this year and zinc is down more than 20 percent. Copper has also declined in the past few weeks.
“The recovery in China has been much more bifurcated to services than industrial demand, which has really impacted industrial metals,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth. “There is also a wide-ranging outflow of investment dollars away from commodities due to higher rates and uncertainty about global growth.”
For consumers, stubbornly high grocery bills are still a massive weight on household budgets in many parts of the world, but there are signs that food inflation could also lose momentum.
Futures for wheat have more than halved from last year’s record high. Russia and the European Union, the top two shippers, are set for bumper 2023 harvests, cushioning the shortfalls wrought by the war in Ukraine.
Brazil is collecting its biggestever corn and soybean crops, tempering feed bills for chicken and hog herds. And vegetable oil prices have dropped sharply.
Restaurants and retailers are starting to take note. Last week, the chief financial officer of US burger chain Red Robin Gourmet Burgers Inc. said on an earnings call that commodity inflation was less strong in the first quarter than expected and should continue to moderate. The head of BJ’S Wholesale Club Holdings Inc. said the retailer has “seen disinflation across the business.”
How this ultimately translates through to retail prices is less straightforward, given that agricultural commodities are just one part. Transportation, labor and other costs all play an important role too, and most consumer companies purchase several months of supply in advance.