Commodity crash signals disinflation is taking hold for now

For households and businesses, the benefits are already starting to show up as headline inflation rates fall, taking some pressure off central banks to keep aggressively raising borrowing costs. Even so, some prices are proving more sticky, and there’s uncertainty over how long-lasting the disinflationary pressures will be, limiting the extent that this will ease the cost-of-living squeeze.

“The drop in commodity prices seems to reflect the stuttering rebound of China, a looming US recession and supply side destruction in Europe,” said Carsten Brzeski, global head of macro at ING. “It’s indeed possible that inflation could turn into temporary disinflation.”

Energy prices have been at the forefront of this year’s commodities plunge, particularly in Europe, where natural gas futures have tumbled by about two thirds this year after shooting to records last summer.

Even oil and its derivatives have gotten cheaper, despite an agreement by producing countries to curb crude output. Diesel prices in the US have fallen more than 30% from their 2022 peak, providing relief for truckers, farmers and consumers in the world’s largest economy.

In Germany, inflation slowed more than forecast in May, driven by energy, according to data published Wednesday. Price growth is cooling across the region, a trend expected to be seen in euro-area numbers due Thursday.

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The big question is how much further those rates will weaken before leveling off. Even if raw material costs fall, other inputs, particularly wages, may be far slower to follow.

But for now, input prices appear to be largely heading downward. On top of that, the supply-chain disruptions that hit large parts of the global economy have also started to ease, and container freight rates have collapsed.

In China, a fading post-Covid rebound is capping price pressures on metals. Nickel has plunged 30% this year and zinc is down more than 20%. Copper has also declined in the past few weeks.

“The recovery in China has been much more bifurcated to services than industrial demand, which has really impacted industrial metals,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth. “There is also a wide-ranging outflow of investment dollars away from commodities due to higher rates and uncertainty about global growth.”

For consumers, stubbornly high grocery bills are still a massive weight on household budgets in many parts of the world, but there are signs that food inflation could also lose momentum.

Futures for wheat have more than halved from last year’s record high. Russia and the European Union, the top two shippers, are set for bumper 2023 harvests, cushioning the shortfalls wrought by the war in Ukraine.

Brazil is collecting its biggest-ever corn and soybean crops, tempering feed bills for chicken and hog herds. And vegetable oil prices have dropped sharply.

Restaurants and retailers are starting to take note. Last week, the chief financial officer of US burger chain Red Robin Gourmet Burgers Inc. said on an earnings call that commodity inflation was less strong in the first quarter than expected and should continue to moderate. The head of BJ’s Wholesale Club Holdings Inc. said the retailer has “seen disinflation across the business.”

How this ultimately translates through to retail prices is less straightforward, given that agricultural commodities are just one part. Transportation, labor and other costs all play an important role too, and most consumer companies purchase several months of supply in advance.

“I would expect food prices to fall over the next six months, that’s certainly the forecast here in the US,” said Joseph Glauber, senior fellow at the Washington-based International Food Policy Research Institute. “All the signs on the commodity side still point to essentially lower prices by the end of the year with the new harvest in. It’s just taking a while for this inflation at the consumer level to abate.”

“At the start of the year, China’s surging recovery from Covid lockdowns raised fears of an inflationary impulse to the US and Europe, transmitted through commodity prices. Headed toward mid-year, China’s fading momentum means the impulse is in the other direction. That’s good news for the Fed and ECB, though the harder part of their challenge – battling rising wages and sticky core inflation – remains undone.”

Tom Orlik, chief economist

Still, it’s too soon to call the end of the cost-of-living crisis just yet, particularly because inflation might come down slower than commodity prices would imply. Goldman Sachs Group Inc. still expects commodities to come roaring back should recession concerns prove to be misplaced.

There’s also the question of whether companies will pass on lower commodity costs. Retailers are resistant to bring prices down once they put them up, usually waiting until there are signs the change will be long-lasting.

There have also been accusations of so-called “greedflation” — where businesses take advantage and jack up prices by more than costs — though some dispute whether that’s actually been driving inflation rates higher.

On top of that, many key commodities are still priced well above levels prior to Russia’s invasion of Ukraine. For some, it’s unclear how much further they will decline, and how much such moves will generate further losses in inflation momentum.

“The disinflation process, like everything else, is highly uneven,” said Tom Halverson, chief executive of CoBank, a cooperative bank that works with rural businesses across the US. “Prices are always stickier down than up; it takes a lot longer and it’s a lot harder to squeeze inflation out.”

(By Carolynn Look and Enda Curran, with assistance from Jack Farchy, Michael Hirtzer, Devika Krishna Kumar, Chunzi Xu, Agnieszka de Sousa, Megan Durisin, Jasmine Ng and Anne Riley Moffat)