Gasoline prices have fallen, but commodities continue to control the future of inflation

Not many people understand commodity markets, but since the Federal Reserve decides how much to raise interest rates, commodity prices have a lot to do with today’s high inflation and the rate hikes designed to stop it, and that affects to all.

The Fed is widely expected to raise interest rates by three-quarters of a percentage point at its meeting that ended Wednesday, in response to the soaring 1.3 percent rise in consumer prices in June, which caused inflation from 12 months to a maximum of 41 years of 9.1 percent. Nearly half of the monthly gain reflects only the impact of energy commodities like oil and natural gas that the Department of Labor breaks down in the report.

And that’s not all: other commodities such as copper, iron ore, corn, wheat and even soybeans also contribute to inflation in the rest of the economy, although many of them are left out of prices. food and energy that are excluded from the so-called “core” inflation measure. Now that commodity prices are falling rapidly, will future inflation reports show that inflation is slowing?

“For now, inflation is a commodity story,” said Moody’s Analytics economist Bernard Yaros Jr. “Although commodities are down now, they are still up.”

Most economists don’t expect the Fed to bet on lower commodities to curb inflation with smaller rate hikes, saying price gains in the rest of the economy need to be fought. But declines in commodities are themselves a sign of slower economic growth and, in energy at least, they are already showing up at the gas pump.

Major commodities have risen by as much as four times since the start of the Covid pandemic, helping kick start the rise in inflation. Crude oil rose to $124 a barrel in June from $64 just before the first US case of covid in January 2020. Wheat went from around $195 to $351 and corn doubled. Lumber, used for homes and renovations, went from $426 to $1,686. Natural gas, a market that, like wheat, has been squeezed by embargoes against Russian exports due to the invasion of Ukraine, it has also doubled in the last year and quadrupled since the beginning of 2020.

All of this translates more or less directly into consumer prices.

The easy part to track is the energy. The jump in crude produced a 60 percent jump in gasoline prices in the past year. The surge in natural gas led to a 13 percent rise in electricity prices, along with a huge jump in coal, the No. 2 fuel used to generate power. The explosion in wheat and corn prices caused a 12.2 percent increase in food prices.

The contribution of other commodities to inflation is more difficult to determine. That’s because the Labor Department doesn’t have data on exactly how much steel adds to the cost of a car, what lumber does to the prices of new homes, or even the relationship between wheat prices and the cost of commodities. baked goods, which rose 13 percent for the year ending June, according to Bureau of Labor Statistics economist Steve Reed.

Coffee has risen 17 percent in the past year, thanks to prices for coffee staples nearly doubling since 2020.

To some extent, consumers can limit their exposure to inflation. They can drive less or use public transportation (which only increased 0.8 percent in the last year) to use less gasoline. Beef and steak roasts are up much less than chicken. Many may wait to buy a used car to see if prices settle. And so.

That’s harder to do with services, which make up 57 percent of the government’s consumer price index. Housing alone is a third of the index, with only a small contribution from commodities, and housing is up more than 5 percent from last year.

Many commodity markets are calming down, which is cooling certain types of inflation. Oil has fallen to $105 a barrel from $140, sending gasoline prices down 10% since mid-June, though Tom Kloza, director of the Oil Price Information Service, warns that gasoline it is probably a few days away from bottoming out in the short term.

Oil market on the rise it will be central to the debate about where the economy is headed next.

“Oil is the tightest physical market in history,” Jeffrey Currie, Goldman Sachs’ global head of commodity research, said on CNBC recently. “The financial markets are trying to price in a recession. The physical markets are telling you something really different.”

Iron ore is down a third since April, one reason new car inflation has slowed. And so.

How long that will last is the big question for the Fed in the coming months, one that will help determine how many more rate hikes are needed. Some economists are skeptical.

“Other than [gasoline]I’m not sure there’s much evidence that lower commodity prices have translated into lower goods prices,” said Richard Moody, chief economist at Alabama-based RegionsBank. “That just takes time, in general, and then there is the question of how much of the price reductions will producers keep and how much will they spend.”