Commodity surge raises stagflation worry

Rising costs are hitting confidence while pushing inflation faster

The world economy is facing a build-up in stagflationary forces as surging energy prices boost inflation and slow the recovery from the pandemic recession.

Oil’s climbed to more than $80 a barrel for the first time in three years, and the Bloomberg Commodity Spot Index rose to the highest level in a decade.

Food prices are also advancing, driven in part by crop failures in Brazil, with a benchmark UN index up 33 per cent over the past 12 months.

Rising costs for households and companies are hitting confidence while pushing inflation faster than economists had expected only a few months ago. That could put policymakers in the uncomfortable position of having to choose whether accelerating prices or weaker growth poses a greater risk.

Comparison

The shock has already drawn comparisons with the mix of economic stagnation and oildriven inflation spikes that dominated the 1970s. While many central bankers dismiss this as hyperbole, the concern is that more enduring price increases will feed into demand for higher pay, tipping the economy into a vicious cycle.

“We’re seeing all of this inflation,” Supriya Menon, a strategist at Pictet & Cie. told Bloomberg TV. “Ultimately how does that get resolved? Part of the way it could get resolved is through demand destruction.”

Bloomberg Economics calculates that a 20 per cent increase in commodity price implies a transfer worth at least $550 billion — roughly equivalent to Belgium’s annual output — from commodity consumers to those that produce the most. In dollar terms, the biggest losers may be China, India and Europe. Winners include Russia, Saudi Arabia and Australia.