Commodity prices and global inflation effects

Recent decreases in commodity prices… Commodity prices have fallen in recent weeks. There was a broad-based price pullback, with large declines in products ranging from the energy group to industry and food.

In agriculture, crop prices for maize, cocoa, cotton and wheat have seen double-digit percentage declines since the beginning of May. West Texas Intermediate, the benchmark for US crude oil, closed the week below $100 a barrel for the first time since May, and natural gas prices have fallen sharply since the beginning of June. Spot prices of construction materials such as aluminum, copper and timber have also fallen sharply since the beginning of May.

Bloomberg commodity prices comparison… Source: Bloomberg

Factors contributing to the decline in prices… Of course, the main reason for this decline is the recession indicators that have become more evident and the demand phenomenon that will be adversely affected accordingly. The growing concern about the global economic recession caused the markets to retreat. This conjuncture was also reflected in commodity prices, and we observed that commodity prices, which rose rapidly due to geopolitical risks and supply problems, entered a cooling process.

The previous supply-side pricing perspective… After the pandemic lockdowns and drought, limited production capacity had reduced commodity supply as global demand revived. The war in Ukraine, one of the world’s largest grain exporters, and the sanctions imposed on Russia, triggered the upward movement of prices even more. At the same time, investors flocked to commodities to hedge against inflation.

CPI effect and policy perspective… When we look at market indicators, we will continue to monitor the effect of high inflation in the short term, despite some signs of price cooling. In the medium term, inflation is expected to decline in an environment where the Fed tightens its monetary policy. The recent decline in the commodity price index movement is promising for CPI, but it seems that it will take some more time for it to show a dramatic reflection on the rates. The signs of a cooling in inflation slightly reduce the possibility of stagflation, with a recession expected in a significant part of the world at least in 2023. However, of course, the US, Europe and developing countries perspective of the event has to be evaluated from different perspectives.

Conclusion? At the current view, market interest appears to be moving away from commodities as demand may slow. Beyond growth concerns, more-than-expected rainfall worldwide has improved conditions, particularly in the agriculture sector, and this summer’s crop yield forecasts are even higher. It is seen that there is a decrease in oil, which can be expressed as stagnation, as in the whole commodity group. Although prices could not determine a clear direction due to bilateral uncertainties, the macroeconomic reflections of the stagnation in demand and price adjustments made by oil players seem to have triggered the last few price movements.

The current declines in commodity prices will likely provide some relief on the consumer price side. The decline in oil prices since mid-June may trigger the softening effect on gasoline prices in local economies. Despite the cooling effect of the downward trend in commodity prices from the current peak, the cautious stance in global inflation continues due to the Russia-Ukraine war and the continuation of supply uncertainties and the dual course of uncertainties on the supply/demand side.

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