InvestmentAAM Inflation and commodity prices

Commodities prices and inflation, what’s the impact?

Q1 2021 inflation numbers are trending higher, but the general consensus is that the current inflationary pressures should wane as the global economy returns to pre COVID levels. A consequence of COVID-19 has been a bottleneck in international supply chains which is expected to naturally resolve itself as raw materials and component shortages disappear.

The primary manner inflation impacts consumer pricing is via higher commodity costs. An example of this is the recent increase in oil prices effecting a 0.5% hike in April and May 2021 inflation. Overall, however, analysts believe the recent escalation in US food CPI is not anticipated to continue and should actually stabilise as the supply improves.

In aggregate, commodities comprise only 4-7% of the total cost of consumer end products. Therefore, an increase in commodity prices does not necessitate an immediate sustained rise in the price of consumer goods. The major factor behind consumer goods and services pricing is the dynamic between market supply and demand, and as the world continues to recover from COVID, supply side pressure is expected to dissipate, resulting in decreased pricing pressure.

In summary, inflation is a contemporaneous concern, but regulators disbelieve it is a primary macroeconomic threat, expecting current inflation drivers to be mitigated through post-COVID supply side stabilisation.

Source: Capital Economics

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