Soaring Energy and Food Prices: Inflation Battle Isn't Over

Date: 10 Aug 2023

Energy and food prices have jumped in recent weeks, and wages are still growing strongly in some of the world's biggest economies. The bond market inflation gauge shows US inflation remaining sticky and elevated.

1. Food Prices Pick Up as Trade Tensions, Extreme Weather Flare

In the past three months, global food prices have experienced their first rise since trade disruptions from India to the Black Sea and extreme weather renewed supply concerns.

The United Nations' index of food-commodity prices gained 1.3% in July, led by vegetable oil, according to a Friday report. 

Last month, Russia exited the Black Sea grain deal that helped usher millions of tons of Ukrainian crops abroad. On top of that, top rice exporters in India banned some shipments of the staple, and extreme weather is curbing harvests in places like China and southern Europe.

Analysts at Capital Economics wrote in a note Friday that the outlook for the global supply of key foodstuffs had "deteriorated" since the start of the year, and they expect higher prices as a result.

2. Oil Hits 2023 Highs

U.S. oil futures rose to their 2023 highs as concerns over a possible escalation in hostilities between Russia and Ukraine overshadowed the first gain in US crude stockpiles in four weeks. Shares of energy companies rallied as traders hedged their bets on the outlook for economic growth.

3. Wages Are Still Growing

While overall inflation has fallen in recent months, one component — pay growth — has shown striking resilience. Wages and benefits paid to US workers rose 4.6% in the second quarter from the same period in 2022, outpacing the broader rate of inflation.

"Labor costs are by far the most important input for services, and are still very important inputs for manufacturing, so if wage rates are still growing very rapidly, even if commodity prices are coming down, inflation could persist," Randall Kroszner, a former governor of the US Federal Reserve System said

4. Is Inflation Cooling Down? Not Yet

A closely watched bond market gauge of what market participants expect inflation to be in the next five years is rising back toward a nine-year high, signalling concern the Federal Reserve may continue to wrestle with elevated price pressures for years.

"If long-term expectations break out toward 2.75% and the yield curve steepens further, that would suggest more worries about the inflation outlook," said George Goncalves, head of US macro strategy at MUFG.

Source: Bloomberg