The days of energy and other commodities acting as deflationary forces may be coming to an end, the World Bank says, citing geopolitical tensions that are putting pressure on demand for oil, industrial metals and other supplies. he warned.
Commodity prices have plateaued over the past 12 months, the World Bank said in a report released earlier Thursday. The Financial Times reported.
This marks a change from the 40% drop in global commodity prices from mid-2022 to mid-2023, led by oil, gas and wheat, which was about 2% lower than the global inflation rate in that year. The FT reported that it contributed to the reduction by a percentage point.
At that time, there was enough supply to meet demand.
But as conflicts between Russia and Ukraine and in the Middle East intensify, so does the need for goods such as oil, gas, agricultural products and precious metals.
The World Bank predicts that prices will fall by just 3% in 2024 and 4% in 2025, FT reported.
This will still remain about 38% higher than the average price from 2015 to 2020, when the pandemic began, according to the FT.
Indermit Gill, chief economist and senior vice president of the World Bank Group, reiterated that “lower commodity prices, a key driver of disinflation, are essentially hitting a wall.”
“This means interest rates could remain higher than currently expected this year and next,” Gill added.
Inflation measures released by the Federal Reserve on Friday showed the headline consumer spending price index rose 0.3% last month, an annualized increase of 2.7%, above expectations of 2.6%.
It also provides reassurance to the Fed’s 2% target, which the World Bank noted is a number the U.S. economy hasn’t seen in more than a decade.
The PCE numbers were released just one day after the Commerce Department reported that the U.S. economy grew at its lowest rate in two years in the first quarter.
Again, the data points were not very helpful in timing rate cuts. Traders agree that the Fed will hold off on cutting interest rates from their current 23-year high of 5.25% to 5.5% until September.
It also expects two 25 basis point rate cuts, for a total of 75 basis points, instead of the three expected rate cuts this year.
The World Bank forecasts a slowdown for most commodities, but prices could still rise in the coming months because copper is a key component in electric car batteries and charging stations.
In the United States, President Joe Biden has phased out sales of cars that run on gasoline and diesel fuel, with the aim of ensuring that at least half of new car sales are electric by the end of 2010.
Internationally, competition in China in particular has spurred investment in EVs, with automaker BYD beating Tesla to become the world’s top EV maker late last year.
The World Bank report also notes that tensions in the Middle East will increase oil and gold prices, which is typical during times of conflict, the FT reported.
The bank said it expects Brent crude oil prices to average $84 a barrel this year, slightly higher than the average in 2023, and fall to $79 a barrel in 2025.
At the time of writing, Brent was trading at just over $84 per barrel. But prices rose above $90 a barrel the week before, after a U.S. official told ABC News that Israel launched retaliatory missile strikes against Iran earlier this month.
Meanwhile, gold has also soared as the precious metal retains its value as a hedge against inflation.
