At its June 15 meeting, the Federal Reserve (FED), the US central bank, decided to raise its rate by 75 basis points to a range of 1% to 1.75%, its most significant rate hike since 1994. Why? Because inflation has reached its highest level since 1982. Still, another component behind this inflationary effect should be considered: the behavior of commodity prices and the forces that may affect them.
Rising Food Prices
When analyzing global inflationary levels, food prices’ behavior is an essential element. Chart 1 shows the index created by the UN Food and Agriculture Organization (FAO) for this purpose.
The Food Price Index comprises the average of five commodity group price indexes: meat, dairy, cereals, vegetable oils, and sugar. These products are weighted by the average export shares of each group over 2014-2016, including 95 price quotations considered by FAO commodity specialists as representing the international prices of the food commodities.
Chart 1: own elaboration. Data by Bloomberg.
This group of food commodities allows the evaluation of their price trends. According to the Food Price Index, there has been a noticeable rise of near 69% between May 2020 and 2022, going from 91.14 to 154.25, as seen in Chart 1.
This performance was led by a 172.34% increase in the vegetable oils group, while sugar and cereals rose by 72.87% and 69.70%, respectively. The latter’s strategic relevance lies in the fact that it includes price quotations for wheat, corn, barley, sorghum, and rice, all part of the food base of many countries.
This backs what has been seen in terms of inflation levels. Even though some structural factors may cause these prices to vary, such as the weather or the harvest seasons, there has been an evident boost in demand following the pandemic, reaching historic highs.
During this year, the index started to show a decline in May and June, with a 2.34% price drop last month, as these three groups have experienced reductions of 7.61%, 2.58%, and 4.14%, respectively. The persistence of this trend is a good sign of a decrease in inflation levels, as the upward pressure will be relieved, at least regarding food prices.
Commodities Volatility
In the case of commodities, inflation is not the only factor. Another force that has been reducing their price momentum is the fear of a global recession, which could, in turn, affect global demand.
On the left side of Chart 2, we can see the behavior of the Bloomberg Commodity Index. This index tracks the prices of 23 commodity futures contracts, including gold, oil, cotton, and coffee. It allows the evaluation of the behavior of the global commodities market and shows how, after peaking at 135 units on June 10, it started to decrease, reaching 116 units on June 11.
Chart 2. Own elaboration. Data by Bloomberg
It is worth mentioning that this trend concurs with the FED rate hike and the growing fear among investors of a global recession. The contraction of some economic sectors could slow down and even reduce the boost in commodity demand.
On the right of the chart, we can see the behavior of gold and Brent oil prices, weighing 13.46% and 8.45% in the index. Both have experienced significant drops, especially during last week.
Each of these commodities is influenced by different forces. Oil behavior relates to expectations about a possible decrease in demand amid a volatile context triggered by the Russian invasion of Ukraine. On the other hand, the reduction in gold derives from the strengthening of the dollar on a global level, as investors have been seeking refuge in US treasury bonds, particularly during June and July.
Both the FAO Food Price Index and the Bloomberg Commodity Index show that the commodity market has experienced an increase in prices, which has undoubtedly served as a force that pushed prices up globally.
However, this price increase has been caused by both a recovery in demand and disruptions in global supply chains. If the demand decreases as expected, the world may face higher levels of volatility for this type of asset, as many of the distortions in production and distribution remain unresolved.
This report was prepared by Gandini Análisis for Supra Brokers only as content. It shall in no case be considered an investment recommendation.
