Commodities Signal Stagflation Risk

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The Bloomberg Commodity Index has bounced more than 2% in the first week of January. At the close of this article (Jan. 10 2021), most commodities are rising well above global GDP growth estimates.

China re-stocking, inventory build-up, and economic recovery on top of a cold winter have driven iron ore and energy commodities much higher even after a strong bounce in the second half of 2020. Oil has soared 7% year-to-date, driven by OPEC cut commitments and rising heating demand, and natural gas has risen between 6 to 8% in most regions because of the cold spell affecting many developed countries. Iron ore is up more than 6%, copper higher than 4%, aluminium rising 2%, alongside soybeans, corn, sugar, or cotton.  

On the other hand, global GDP growth estimates are unchanged in the past two weeks despite the vaccine rollout and positive news about trade deals and the Brexit agreement, while eurozone and Canada estimates have been trimmed significantly.

Central banks remain oblivious to the risk of stagflation, but it is important because a significant part of the commodity rise, priced in US dollars, comes from the impact of the massive increase in central banks’ balance sheets.

There is a problem when the entire obsession of monetary policy is to create inflation. That they have ignored the massive inflation in asset classes doesn't bode well, and commodities are an important asset class that feeds through to the real economy.

Take the eurozone official inflation figures for December. The estimated number for December came at -0.2% due to a 6.9% fall in the energy component. However, fresh food prices rose more than 2%, and insurance, rent, as well as basic utilities have not fallen at all. Furthermore, no Eurozone citizen has seen their energy bill after taxes come down 6.9%.

As Marshal Reindorf of the IMF explains, “underestimating the weight of food and overweighting transport are the main causes of incorrectly estimating inflation.” Jochen Moebert estimates that the cost of housing is underestimated by making national averages that disguise the increase in the most populated cities.

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