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For the Fed and consumers, commodities still control the future of inflation


A customer pumps gas into their car at a gas station on May 18, 2022 in Petaluma, California.

Justin Sullivan | beautiful pictures

Not many people understand the commodity markets, but when the Federal Reserve decides how much to raise interest rates, commodity prices have a lot to do with current high inflation, and rate hikes are designed to prevent it – and that affects everyone.

The Fed is expected to raise interest rates by three-quarters of a percentage point at its meeting ending Wednesday, in response to an explosive 1.3% increase in consumer prices in June, which brought Inflation in 12 months reached a 41-year high of 9.1%. The monthly increase almost exclusively reflects the impact of energy commodities such as oil and natural gas that the Labor Department released in the report.

And that’s not all: other commodities like copper, iron ore, corn, wheat, and even soybeans also play a role in driving inflation in the rest of the economy, even when many other goods outside of food and energy prices are excluded from the so-called “core” measure of inflation. With commodity prices currently falling rapidly, will future inflation reports show inflation slowing?

“Inflation is a commodity story for now,” said economist Bernard Yaros Jr of Moody’s Analytics.

Most economists do not expect the Fed to bet on lower commodities to peak inflation with smaller rate hikes, and argue that price increases in the rest of the economy need to be be dealt with. But the drop in goods is in itself a signal of slower economic growth, and in energy terms at least, they’re already showing up in gas pumps.

Gasoline prices fall, inflation is unacceptably high

“We expect a clear message [from the Fed] Morgan Stanley economist Ellen Zentner said last Friday that inflation remained unacceptably high. leaves little room for complacency. “

Major commodities have quadrupled since the start of the Covid pandemic, helping to kickstart inflation. Crude oil rose from $64 to $124 a barrel in June just before the first US Covid hit in January 2020. Wheat increased from about $195 to $351, and corn doubled. Sawn timber, used for housing and renovations, increased from $426 to $1,686. Natural gas, a market, like wheat, which has been squeezed by embargoes on Russian exports for the invasion of Ukraine, has also doubled last year and quadrupled since the beginning of 2020.

All of this more or less translates directly into consumer prices.

The easy part to keep track of is energy. Rising crude oil prices created a 60% increase in gasoline prices last year. The increase in natural gas prices led to a 13% increase in electricity prices, along with a spike in coal, the No. 2 fuel used to generate electricity. Booming wheat and corn prices sent grocery prices up 12.2%.

It is difficult to determine the contribution of other commodities to inflation. That’s because the Labor Department doesn’t have data on exactly how much steel increases the cost of a car, what effect wood has on new home prices, or even the relationship between the price of wheat and the price of a new home. cupcakes, which were up 13% for the year ending June, according to Bureau of Labor Statistics economist Steve Reed.

Coffee prices rose 17% last year as commodity coffee prices have nearly doubled since 2020.

To some extent, consumers can limit their exposure to inflation. They may drive less or use public transport (up just 0.8% last year) to use less gas. Roast beef and steak increase in price much less than chicken. Many people may be waiting to buy a used car to see if the price stabilizes. And such.

That’s harder to do with services, which make up 57% of the government’s Consumer Price Index. Housing alone makes up a third of the index, with only a small contribution from goods, and housing has risen more than 5% since last year.

Many commodity markets are stabilizing again, which cools some types of inflation. Oil has fallen from $140 to $105 a barrel, sending gasoline prices down 10 percent since mid-June, although Tom Kloza, head of the Oil Price Information Service, warned that gasoline could be in for a few days. to a short-term bottom.

Crude oil market rises will be crucial in the debate over where the economy is headed next.

“Oil is the tightest physical market ever recorded,” Jeffrey Currie, head of global commodities research at Goldman Sachs, told CNBC recently. “Financial markets are trying to price in a downturn. The physical markets are telling you something really different.”

Iron ore is down a third since April, one reason auto inflation has slowed. And such.

How much that spread will be is the big question for the Fed in the coming months, one that will help determine how many more rate hikes it needs to be. Some economists are skeptical.

“Other than [gasoline]It is unlikely that there is much evidence that lower commodity prices have translated into lower commodity prices, said Richard Moody, chief economist at Alabama-based RegionsBank. “That generally just takes time, and then there’s the question of how much discount manufacturers will keep and how much will they continue.”

Recent Commodity Actions and Outlook

Crude oil

Price: Crude oil prices rose from sub-$65 pre-Covid to as high as $140, but have recently been trading in the $100 range.

Consumer impact: Drive less, switch to electric cars or vehicles with higher mileage. Public transport prices have been little changed recently.

Opinion: Depends on the outcome of the Ukraine war and whether there is a recession soon.

Cotton

Price: Up from 71 cents/pound pre-Covid to a peak of 99 cents/pound in recent trading.

Consumer impact: Delay buying clothes or switch to other fabrics.

Opinion: Displays the price of clothes, fluctuating from one month to the next.

Iron Ore

Price: Up from $94/mt pre-Covid to $104/mt in recent trading.

Consumer impact: Delay the car purchase.

Opinion: Iron ore has halved from its peak, dampening vehicular inflation in recent months. Weak Chinese demand affects the outlook.

Gewgew

Price: Up from $426/1,000 feet pre-Covid to $579/1,000 feet in recent trading.

Consumer impact: Delay the purchase and repair of a new home.

Opinion: High interest rates are a bigger factor in consumer behavior and are dampening home price growth.

Chicken

Price: Up from $2.07/kg pre-Covid to $3.67/kg in recent trade.

Consumer impact: Switch to beef, as the price of consumer chicken has doubled compared to beef in the last year.

Opinion: The ministry cut its output forecast and raised its egg price outlook last week, blaming high corn and soybean prices.

Source: CNBC, Macrotrends, Markets Insider, US government



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