An inflationary trend, though still in its nascent stage, is now undeniably evident across a broad range of commodity and food prices. But the question remains: Is this a bump on the road toward economic normalcy, or do rising prices signal the return of sustained inflation after a decades-long absence from many advanced economies.
Background
Prices have been ticking upward since the New Year, and the trend seems to be picking up steam as COVID restrictions ease in advanced economies. It’s evident across a broad spectrum of commodities, with iron ore, steel, and timber reaching record highs to cap off April, and copper trading at prices not seen since 2011. Prices for battery metals like cobalt and lithium have also been spiking. The breadth of the trend, driven by surging global demand, has some commentators raising the possibility of another commodities supercycle.
Food prices have not been spared from inflation, including grains, oilseeds, sugar, and dairy. The price of corn – a key staple influencing prices of everything from livestock feed to soda – has jumped 142% over the past year, as rising demand outstrips falling supply due to drought conditions in Brazil. A similar story prevails in soy markets, where bad weather in Argentina and booming demand from China are driving prices up to decade highs. Unsurprisingly, FAO’s Food Price Index has been ticking upward in tow. The index saw eight months of consecutive monthly gains through to March.
PPIs across advanced economies have reflected these trends. Inflationary alarm bells rang last month when China’s producer prices came in 4.4% above estimates for March. The April numbers, forecast at 6.6%, are expected to continue the trend. Germany also recorded its biggest year-on-year jump in PPI prices over the same period. US PPI data for March also beat estimates, posting the highest year-on-year gain in over nine years.
Alarm is brewing among market luminaries, even the Oracle of Omaha himself, who at the recent Berkshire Hathaway annual meeting remarked that “We are seeing very substantial inflation… It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.”
Analysis
Inflation is back – but how long will it be staying?
Those who view it as a passing trend point to the fact that many of the factors that seem to be fueling the inflation are temporary in nature. On the supply side there’s the shock of the COVID-19 pandemic, which dampened investment and disrupted global supply chains. These very supply chains are now being strained to their limit by a surge on the demand side, as governments like China and the United States enact fiscal stimulus to kick-start their post-COVID recoveries. According to this view, current inflation is but a blip that will work itself out as supply chains adapt; there is no systemic risk of out-of-control hyperinflation so long as the conventional driver of inflation – wages – remain depressed by moribund labor markets. Moreover, many of the year-on-year price movements that are generating so much alarm are in fact skewed due to their baseline comparison to 2020, a time when a global economic shutdown was deflating many of the inputs that are currently ‘booming.’
