Overview of Impact of High Inflation on Commodity Prices
High and unstable prices of commodities significantly affected the global economy. Such high prices will increase inflation and affect growth, and the effect will vary between countries. The Russia-Ukraine conflict triggered an increase in commodity prices. Most of the emerging and developing economies in Asia are net importers of oil, gas, and metals, making them vulnerable to the increasing prices of commodities globally. This indicates that a decline in their terms of trade, a measure of the costs of a country’s exports in relation to its imports, will result in slower growth, weaker currencies, and deteriorating current-account balances.
According to the International Monetary Fund (IMF), when prices are broken down substantially, for food and manufactured products at the household level, it appears that there are deeper sector-specific links between China, the US, and Japan. According to the Bank of Japan, Tokyo's core consumer price index, which excludes energy and fresh food, increased 1.9% in May 2022.
How do COVID-19 and Russia-Ukraine Conflict Influence Inflation?
The COVID-19 pandemic and the Russia-Ukraine conflict resulted in an increase in commodity prices globally. The most notable example is China, where the lockdown in Shanghai and other regions delayed a range of activities and presented the risk of further disruption of regional and international supply chains. According to the IMF, such lockdowns are a major factor contributing to projections of a 4.4% decline in China's economy in 2022, which will affect Asia's growing economies through decreased trade and demand.
According to the US Bureau of Labor Statistics, inflation in the US peaked, but after reaching a 40-year high of 9.1% in June, concerns about the Federal Reserve's aggressive monetary tightening returned in full force. Inflationary pressures could increase as supply chain disruptions could continue owing to the intermittent nature of lockdowns in the GDP powerhouse of China.
According to the United Nations Conference on Trade and Development (UNCTAD), the rest of 2022 will see more volatility in the world of trade, with growth likely to decline because of increasing interest rates, inflationary pressures in many countries, and negative global economic spillover from the conflict in Ukraine. Following the crisis in Ukraine, commodity price hikes are expected to affect global growth and contribute to inflation.
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