The economic story of 2022 so far has been one of inflation rising even further. It was only on Thursday that we discovered that the US Consumer Price Index or CPI had risen to an annual rate of 7.5% triggering all sorts of rumours about a response today.
The bigger-than-expected jump in inflation has led to surging probabilities that the Fed might do an emergency rate hike this month. ( business insider)
But beneath the inflation rise has been something which has continued as we got assurance after assurance that it would stop. This has been the rise in commodity prices which are both a consequence of and also a driver of the supply chain crises we have been seeing.
The early signal was the price of lumber which many of you will recall surged for a while last year. Then we saw a dip which those who were arguing that the inflation push would be transitory leapt on as part of their argument. This came with the implication that other commodity prices would do that same, Indeed there were all sorts of sophisticated modelling and torturing of the numbers to show that a decline was only just around the corner. How is that going?
Lumber prices have been limit-up for 7 days in a row ( @ForexLive )
There are various reasons for this including the weather and a doubling of US tariffs on Canadian wood imports. The latter is rather awkward for a US government that has blamed producer price gouging for many price rises. But the fundamental point here is that the area which initially saw price surges is back like The Terminator which is the opposite of the return to normality we were promised for 2022.
High Commodity Prices
The impact of this is being seen around the world.
TAIPEI — Mary Hu, a clothing shop owner in Taipei and mother of three, refused to throw away five cracked eggs, using them to make a big bowl of fried rice for lunch.
“How can I throw them away?” she gasped. “Do you have any idea how hard it is to buy eggs now?” ( Nikkei Asia )
She cannot find eggs because something we have been noting for a while now is in play.
Egg farmers are having to pay surging prices for grains such as corn, soybeans and wheat — key ingredients for animal feed. Their logistics costs have also been on the rise, and waves of bird flu have further constrained their finances.
Discouraged farmers are now forgoing purchases of high-priced chicken feed and as a result, far fewer eggs are being laid.
Oh and the government has been freezing the retail price as we see an example of intervention making everything worse.
That theme continues in Thailand.
The government is looking to lower the excise tax on diesel by three baht after widespread protests against high fuel and commodity prices but opposition parties are questioning the timing of the move.
The government capped the price of diesel at 30 baht per litre in October due to protest by truckers from the Land Transport Federation of Thailand (LTFT) over high fuel prices. The truckers want the government to lower the price to 25 baht per litre. ( Thai Enquirer )
The Overall Position
Here is the view from the World Bank about January.
Energy prices surged 8% in January, led by coal (+16.1%), U.S. natural gas (+16.1%), and oil (+15.2%), the World Bank’s Pink Sheet reported. Non-energy prices gained 4.7%.
Agricultural prices climbed 4.2% in January. Food prices increased 5.2%, led by oils meals (+8.7%) and grains (+4%). Beverages gained 1.4% while raw materials rose 2.6%. Fertilizer prices declined 3.6%.
Metal prices increased 7.3% in January: iron ore (+13.3%), nickel (+11.7%), aluminum (11.5%); tin and zinc (+6% each), and copper (+2.4%). Precious metal prices rose 1.7% , led by platinum (+5.2%)
This was followed last week by this.
The Bloomberg Commodity Spot Index, which tracks 23 energy, metals and crop futures, has touched a record this year. That has been driven in part by surging oil prices, which have hit their highest level since 2014.
Shortages Too
It is no great surprise that higher prices are coming hand in hand with shortages as one begets the other. The Financial Times has been looking at this.
Stockpiles of some of the global economy’s most important commodities are at historically low levels, as booming demand and supply shortages threaten to fuel inflationary pressures around the world.
I would remind you again that this was supposed to be over now whereas instead we have this.
Problems are particularly acute in metals, where spot prices of several contracts on the London Metal Exchange are trading higher than those for later delivery, as traders pay large premiums to secure immediate supply.
This is the most extreme inventory environment,” said Nicholas Snowdon, analyst at Goldman Sachs. “It’s a completely unprecedented episode. There is no supply response.”
A couple of important metals are particularly feeling the strain.
Copper stocks at major commodity exchanges sit at just over 400,000 tonnes, representing less than a week of global consumption. Aluminium stocks are also low, as smelters in Europe and China have been forced to cut capacity because of the huge financial strain caused by spiralling energy costs.
Which has led to this.
Aluminium hit a 13-year high above $3,200 a tonne last week after Goldman said stockpiles could be exhausted by 2023.
March Copper futures are US $4.45 as I type this or up 19% over the past year.
Of course there is also the energy issue.
On Friday, the International Energy Agency warned that crude oil prices, which are already trading above $90 a barrel, could climb further as producer group Opec and its allies struggle to revive production after the worst of the pandemic.
“If the persistent gap between Opec output and its target levels continues, supply tensions will rise, increasing the likelihood of more volatility and upward pressure on prices,” the IEA said.
Then there is the issue described by the Rolling Stones like this.
But it’s all right. I’m Jumpin’ Jack Flash
It’s a gas! Gas! Gas
Back to the FT.
In Europe, gas prices also remain elevated amid heightened geopolitical tensions over Ukraine and lower flows from Russia. Across the continent, gas storage facilities are 35 per cent full, and below seasonal averages, according to commodities consultancy ICIS.
In fact we can bring that right up to date.
European natural gas prices surge as tension over Ukraine stokes supply concerns 📈📈
Dutch TTF futures jump as much as 14% ( @SStapczynski )
Oh and I have a friend who works for a Colombian coffee producer who for the first time in a while ( for obvious reasons) is visiting the production areas in Peru and Colombia at the moment. So I noted this too.
Supply disruptions and lower exports from producers in Central America have driven stockpiles of arabica beans on the ICE futures exchange to their lowest level in more than two decades, as coffee buyers rush to lock in supplies.
Comment
My purpose today is not to predict further price surges but to point out that what we have already seen will drive inflation into the summer of this year. Higher energy and fertiliser prices will for example affect harvests and food prices through that time period. Suppliers of other goods will be locking in higher commodity prices as supplies run short.
The wild card at the moment is the situation concerning Ukraine. This has particular influences on wheat prices where both it and Russia are substantial producers and also oil and gas mostly via Russia. Probably things will calm down although events can create themselves in such situations with the first world war being an example of one which started by accident.
So we are back to the theme of higher inflation continuing in 2022, or at least everyone except Stanley Pignal of The Economist who seems to be living in another world.
The economist who wins is the one who can explain why everyone feels they are getting poorer even though they are getting richer.
Some will be getting richer ( commodity producers) but most will be getting poorer.
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