Commodity prices in retreat, but what does it mean for inflation?

Sunday, 24 July 2022

Steel prices are back down below their price at the start the year, despite rising sharply after Russia’s invasion of Ukraine, and for many other commodities it is a similar story.

ANALYSIS: Prices for a wide range of globally-traded commodities have slipped well below the level they sat at before Russia’s invasion of Ukraine, as recession fears mount around the world.

Many agricultural commodities, including corn, oats, palm oil, canola and sugar, are also now cheaper than they were at the start of the year.

Most remarkably, perhaps, the price of wheat futures has fallen to US$7.59 a bushel, which is virtually unchanged on the start of the year, and 40% down on the peak of US$12.62 a bushel they reached in mid-May.

International timber and cotton prices have slumped 49% and 12%, respectively, since December after also surrendering huge post-invasion price spikes.

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It is a similar story for many metals, with the price of aluminium and steel both down 16% and copper down 24%.

The glaring exceptions to the commodities retreat include oil, which is trading up about $13 a barrel over its pre-invasion price, coal which has more than doubled to US$409 a tonne, and natural gas prices which have also more than doubled.

Milk powder and rice have also made solid gains.

The higher oil price could have been expected to add about 13 cents a litre to the pre-invasion price of petrol and diesel.

That had been greatly compounded by higher refining margins for both petrol and diesel, but refining margins for petrol, at least, now appear to be in full flight.

At the turn of the year, US energy company Neste put the refining margin for petrol at about US$13 a barrel.

The consumer price index (CPI) records changes in the price of hundreds of goods and services. (First published January 20, 2022)

That climbed to US$54/barrel in early June, which could be expected to add about 41 NZ cents a litre to the price of petrol at the pump.

But the margin has now crashed almost all the way back down again to US$16 a barrel.

Will the falling price of many commodities help alleviate the rising cost of living?

Oil prices directly account for more than a third of the price of fuel at the pump and the fact the price of refined products is now heading south should have an impact.

But most other commodity prices have only a modest bearing on the final price of goods and services in the shops in New Zealand.

When global wheat futures jumped 60% to nearly US$13 a bushel in March, that translated to about an extra 30 cents on the price of a kilo of flour, for example.

So the effect of the retreat in prices should not be overly dramatic.

Similarly, the fact the price of copper is down 24%, or about $4.25 a kilo, over the year is not going to save anyone a heap of money on their bathroom rennovations.

Capital Economics analyst Marcel Thieliant estimates that the price of commodities only accounts for about 6% of the final prices that Australian consumers pay for goods and services, meaning a 10% decline in commodity prices might only shave 0.6% off prices.

And, as he notes, not all commodity prices have been falling in price.

Unfortunately, still sky-high coal prices can potentially punch more than their own weight in contributing to inflation.

Due to the structure of our power market, coal prices can infuence not only the price of generating power from the Huntly power station to meet peak morning and evening demand, but also the price that all other generators can charge for their electricity as well.

Thieliant believes that inflation will continue to surge in Australia despite the commodities retreat, driven by more powerful forces, such as a tight jobs market.

New Zealand may be past its inflation peak, but there seems little reason to think the direct impact of commodity prices would have much more of an impact here than there.