A new inflation headache may be on the way as commodity prices—and we’re not just talking about the higher cost of gasoline—have started off the year with a robust rally.
The Bloomberg Commodity Index, which includes prices for energy, grains, industrial and precious metals, livestock, and soft commodities like coffee and cotton, is up more than 10% from the end of last year and now is lingering at the highest level since 2014, as the chart below shows.
The Federal Reserve, already grappling with inflation running at the highest level since 1982, is about to embark on a series of increases in its benchmark fed funds rate aimed at cooling consumer demand and reining in prices. Higher interest rates make borrowing more expensive, which in turn quells spending. But with a broad-based rise in the price of commodities used in the production of everything from food and clothing to heating and electronics, the Fed’s job could prove more challenging, some economists say.
“Given the start seen in 2022, commodity prices will continue to cause increasing headaches for policy makers,” wrote Jim Reid, a research strategist at Deutsche Bank, in a commentary. “Clearly these things can turn on a dime,” but there isn’t any sign prices will reverse this year as the Fed had hoped.
Much of the rise in commodity prices is due to depleted stocks at a time when both demand and manufacturing are picking up, analysts said. While some of the increases are due to COVID-19-related supply disruptions, other contributors include years of underinvestment—in copper mining, for example—and bad weather (as with coffee).
Meantime, consumers may have to wait it out as supply and demand imbalances eventually sort themselves out. “Historically, commodity prices don’t rise forever,” said Kevin Kliesen, business economist and research officer at the Federal Reserve Bank of St. Louis. “The cure for high prices is high prices.”
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