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Commodities upswing underway
… higher and higher
Global commodity prices are in an upswing. We think they have passed the trough for the cycle. Demand appears to be lifting and the supply-side is ‘super-squeezed’. This despite the fact that nominal commodity prices were high to start with. There is another factor to consider too. In ‘real’ terms – that is, relative to the US CPI – commodity prices are not that high – they are close to the historical average. That is, relative to the other goods and services you can buy, commodities have held their value. Given the general price level is unlikely to go back to its previous trend – it is now likely to be permanently higher – so too the current elevated nominal commodity prices may be a ‘new normal’.
Different drivers mean different implications for growth, inflation and interest rates. As we have noted before, if commodity prices stay high, they are likely to contribute to the ‘sticky’ inflation challenge.
And, as we have noted before, we can see good reasons for this. Demand indicators have started to pick-up as the global industrial cycle is turning more positive. Copper prices, which are often seen as a timely indicator of the industrial cycle, have picked up strongly. The supply-side for commodity markets is constrained by persistent factors – including geopolitics, climate change and the energy transition – in what we have been calling a ‘super-squeeze’.
The striking thing about the upswing in commodity prices, then, as Chart 1 (see below) shows, is that commodity prices were already high, but they are moving even higher!
But are they really that high?
Maybe not.
Yes, they are high in nominal terms, but in real terms, they are around the historical average (Chart 2 – see below).
Breaking this down a bit further. By nominal terms, we mean USD terms (a standard benchmark). But the recent burst of high consumer price inflation has meant that US dollars now buy less goods and services than they used to. On the other hand, commodities buy as many other goods and services as they have done in the past on average.
This, of course, largely reflects the recent surge in CPI inflation.
Because we have not had high inflation for many decades, the effect is quite unfamiliar.
But here’s the kicker.
Because central banks target inflation, not the price level, it seems unlikely that the price level will return back down to its previous trend any time soon.
Commodity prices too, may therefore stay at a new higher nominal level.
Different drivers mean different implications for growth, inflation and interest rates. As we have noted before, if commodity prices stay high, they are likely to contribute to the ‘sticky’ inflation challenge.
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