Commodity Price Gain Deals inflation to World Economy

The world economy faces an increase in inflation as rising energy prices slow the recovery from the Covid pandemic collapse.

Oil’s price rose to more than $81 a barrel, which happened for the first time in three years. , natural gas to deliver for October traded at the most expensive in seven years, while the Bloomberg Commodity Spot Index climbed to its highest level for the first time in about ten years. 

After the crop failures in Brazil, food prices also started rising, with a benchmark U.N. index of more than 34% over the past several months.

Overview

Households and companies also experience rising costs while inflation pushes faster than statisticians expected a few months ago. That might put policymakers in the difficult situation of choosing which poses more risks for the economy: stimulating prices or weaker growth. The shock has already parallelled the mix of oil-driven inflation and economic stagnation. While several central bankers consider this hyperbole, the matter is that more permanent price rises will produce demand for higher pay, shifting the economy into a destructive cycle.

Bloomberg Economics estimates that a 21% rise in commodity price means a transfer worth at least $555 billion from commodity to those producing the most. In dollar terms, some regions would lose, including India, China, and Europe. Winners might be Saudi Arabia, Russia, and Australia.

This model also estimates a $10 rise in oil prices that add around 0.3% to annual inflation in the euro area, U.S., and the U.K. 

Higher dependence on oil imports indicates the burden on growth which might be more significant in Britain as higher prices compress real household incomes.

George Buckley wrote in a report that greater energy prices usually lead to lower reliance, significantly when growing virus cases might worsen the slow economic recovery.