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Inflation – The Next Shockwave in Commodities?

It has been quite a long time since we had inflation rates at over 5% in the USA yet, last month, the US inflation rate hit 5.4%, the highest since 2008 and higher than the 4.9% predicted by economists. This against a backdrop of printing money like never before (over 40% of all USD in existence were printed in the last 12-months), rising prices for commodities and raw materials. Behind the inflationary pressure are also shortages of all kinds of materials and products like bicycles, used cars and more that are currently driving consumer prices ever higher. This is a direct knock on effect of lockdown policies and COVID, which helped to disrupt production, supply chains and consumption. However, USD inflation essentially erodes the value of the USD driving prices of commodities higher in the process as most are USD denominated.

Plainly, this is a political topic and as reported by the FT, things are heating up there too.

“We’re at a place where a set of pandemic related services are still normalising their prices back to where they were before the pandemic. We’re in a world where we see a very concentrated bottleneck around autos . . . and everything else in the core series we’re seeing deceleration,” a White House official said on Tuesday.

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However, Republican lawmakers pounced on the figures, blaming the Biden administration’s big fiscal stimulus policies for dangerously overheating the economy. “Inflation is taxation!”, tweeted Elise Stefanik, a congresswoman from New York state and a member of her party’s leadership in the House of Representatives. 

“Families are feeling it everywhere — from the supermarket to the gas pump to housing to the used car lot. And beyond,” Mitch McConnell, the Republican leader in the Senate, said in a speech. “All thanks, in large part, to the Democrats’ half-baked spending spree from the springtime,” he added.

Politics also helps inform the views of economists who are spilt into those who see this as transitory and those who do not. Up until recently, the transitory viewpoint had the majority but things do appear to be switching slowly. Some commentators expect inflation to peak at over 10% pointing to the money printing and fiscal policies that put an $8 trillion stimulus in place along with huge Government stimulus spending while others see it as a phase that will pass once the lockdown ‘catch up’ is over. I am no economist and feel I am not qualified to judge which way things will go, but it does appear to me that which ever group turns out to be correct, the days of low inflation and deflationary pressures are over.

The relationship between commodities and inflation seems to me to run both ways. Higher commodity prices create inflationary pressures and pressure on the USD drives the real prices of commodities higher. Commodities can also be seen as a hedge against inflation making them more attractive to investors. However, core inflation, which excludes fuel and food prices, currently seems to be very high only in the case of the US.  So it is a bit of a dilemma where there are really two perspectives (likely coloured by political persuasion) as to where inflation goes from here. Perhaps the most important fact is simply, as I stated above, that inflation is back after quite a long absence and it will have price impacts on commodities, raw materials and finished products.

One area where we haven’t seen too much inflation over time though has been in the area of CTRM software. Competition along with other factors appear to have kept CTRM and related software prices more of less in check for sometime and there is often talk of discounting by vendors to win business. However, as demand seems to be rebounding, and as inflation feeds through the system into wages and other costs, perhaps we will also see signs of increasing prices there as well?