Creeping threat

| Updated on May 20, 2021

The surge in global commodity prices poses a challenge in managing inflation

At a time when the demand contraction caused by the second wave of the Covid-19 pandemic is beginning to threaten growth, the surge in global commodity prices is likely to pose fresh challenges. As global growth began rebounding this year, demand for all commodities — agri, metals and energy — has also been rising. The Commodity Research Bureau’s all commodity index has gained 22 per cent since the beginning of 2021 and 47 per cent over the past 12 months. Lower inventory carried forward this calendar year due to production cuts in 2020 coupled with rising demand from China has made prices of metals such as iron ore, copper and aluminium rally around 15 per cent over the last three months. Agri commodities have also witnessed spike in prices due to adverse weather as well as higher demand from livestock owners. Global crude oil prices may have steadied in recent times due to the resurgence of the pandemic in many countries leading to travel restrictions but they’re still up almost 30 per cent in 2021.

While there are some who think that a super-cycle could have begun in commodities where demand continues to increase over many years leading to a sustained rise in prices, that seems unlikely. The surging demand can be replaced by caution if successive waves of pandemic keep recurring in various parts of the globe. But there is no doubt that the increase in commodity prices is beginning to impact inflation across the globe. India’s wholesale price index was at a record 10.49 per cent in April. While base effect was partly responsible for this spike, there was a 20 per cent increase in inflation in fuel, power and light. Of concern is the inflation in primary articles at 10.2 per cent and manufacturing at 9 per cent, which show that Indian businesses will have to pay more for their inputs, going forward. These will eventually result in increasing the CPI, which is currently at 4.49 per cent. Other countries including the US are facing a surge in inflation in recent months and this is now beginning to affect financial markets too. There is growing fear that the US Federal Reserve and other central banks may begin monetary tightening in the coming months to control rising prices and this is leading to spike in global bond yields and selling in riskier assets including equities.

The silver lining for inflation in India is that the second wave of the pandemic has not impacted supply, as pointed by the RBI. Food inflation may moderate further if the monsoon is normal, as has been predicted. The Centre can provide some relief by cutting the excise duty on fuel. Bringing petroleum products under GST could be a good way to start rationalising fuel prices for consumers. While the Reserve Bank of India has, of late, been giving greater weight to growth, it will have no choice but to take apt monetary action if CPI inflation starts rising.

Published on May 20, 2021

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