With sky-high inflation and a complex geo-political environment, global economies are faced with a seldom-seen situation. Here’s how you can prepare.
With levels of inflation not seen in decades, rising unemployment, and slow economic growth, global economies are beginning to reflect a period of stagflation last seen over forty years ago.
But what is ‘stagflation’? And what will its impacts be on food and energy prices?
In the fourth edition of our Commodities in Focus webinar series, we looked at what stagflation is, how our economy measures up to times past, what drivers are causing the current situation, and – importantly – how you can prepare for what’s next.
During an hour-long conversation, our Principal Specialist in Macroeconomics and Commodity markets, Hemant Bansal, was joined by two of our market experts, Nishita Sharma and Kumar Amit, to discuss the current landscape and future developments.
The full webinar is now available on demand, but here are the highlights of that conversation.
An unwelcome surprise
The recent increase in worldwide inflation took many by surprise, impacting all major economies across the globe. In the US alone, consumer prices surged 8.6% in May compared to the previous year, raising inflation to a new four-decade high and giving American households no respite from rising costs.
Soaring energy and food prices, along with Russia’s invasion of the Ukraine, also saw records broken in Europe, ushering in the highest levels of inflation since the Eurozone began in 1997. Emerging markets like India and Brazil are experiencing a similar fate.
Much of this inflation is caused by food and beverage and energy commodities that tend to have a significant impact on headline inflation due to their volatile price fluctuations. The prices for crude oil, natural gas, grains and oils have all seen significant jumps in recent months – and the hard times aren’t over yet.
Ultimately, there are several contributors to this situation. High food and energy prices caused by Russia’s invasion of Ukraine, a growing demand for goods, labour market disruptions, and the continuing effects of the pandemic – including a $9 trillion global investment in fighting it which provided an additional tailwind to the demand. Those forces are all contributing to the situation we find ourselves in today, and there’s a word for it; one you might not have heard for quite some time.
What is Stagflation?
Stagflation is a portmanteau that describes a very particular economic situation, where stagnant economic output meets high inflation, high unemployment, and rising consumer prices.
What makes this situation unique is that high inflation typically occurs during periods of strong economic growth and low unemployment, price levels are usually driven by an economy’s level of demand, and unemployment generally falls when demand increases.
Conversely, stagflation sees rapid price hikes go hand-in-hand with widespread joblessness. It’s the worst of both worlds, and something we haven’t witnessed since the 1970s. Back then, a combination of external supply shocks – like an OPEC oil embargo that saw the price per-barrel shoot up 400% to $13 – and policy failures during the Nixon era were the root cause.
So where are we today, with the effects of the Russia-Ukraine war, global pandemic, and our own monetary policies, compared to where we were back then? US inflation is currently at a 40-year high, supply chain shortages are at odds with a resurgence in global demand, and energy and food prices have surged once again. There are definitely parallels to be drawn, and the odds of stagflation have increased since last year. But our webinar revealed that inflation is expected to remain well below the peaks we saw in the 1970s.
This is largely because supply shocks of the Russia-Ukraine war are likely to have less of an impact than the oil shocks of the 70s – but that doesn’t mean there isn’t still plenty of work to do now to prepare for what’s to come. Especially for procurement professionals working in energy or food and beverage markets.
How will stagflation affect Food and Energy commodities?
During the webinar, our inflation modelling experts took a deep dive into how the current economic climate is set to affect various commodities over the coming months. Here are some of the top-level findings.
Crude oil:
Our experts expect crude oil prices to increase nearly 55% this year compared to prices in 2021, driven by supply disruptions in Russia amid its conflict with Ukraine. But they may witness a 9% year-on-year drop in 2023 if inflation peaks, as slower demand and improved supply pushes prices back down, similar to the pattern observed in 1975.
Natural gas:
In 2021 natural gas prices in Europe surged, reaching record high levels by the end of the year. This was largely due to lower inventory levels, supply outages, and lower than expected demand.
This year, the Russia-Ukraine conflict has caused high volatility in the natural gas market. In May, prices were 150% higher than in 2021. However, Europe’s attempt to reduce dependence on Russian gas and expectations of lower demand due to elevated prices may push prices down in 2023 – which mirrors what happened during the stagflation of the 1970s.
Corn and wheat:
We’ve seen a sharp upside rally in global grains prices in H1 2022 and prices are likely to remain elevated throughout the year. If stagflation is inevitable, these prices will likely inch down in 2023, although the likelihood of constrained supply may limit the price drop.
High prices have mostly been driven by a supply crunch, caused by drought in the US and South America, as well as the Russia-Ukraine war, which has halted grain exports from the Black Sea – a region that accounts for around 27% of global wheat production.
Palm and soybean oil:
Prices of all vegetable oils reached new highs in the first half of this year, too. And while we expect them to fall slightly in the second half of the year, they will remain uncharacteristically high.
The Russia-Ukraine war has compounded the existing supply challenges in the vegetable oil market. This is largely due to the loss of sunflower oil from Ukraine, the world’s largest producer of sunflowers.
Moving forward, in the event of stagflation, prices will most likely decline in 2023. A projected recovery in supply of key vegetable oils further indicates a downward movement in prices during 2023.
A roadmap for navigating uncertain economies
The question procurement professionals will be asking themselves in the coming weeks and months is how best to mitigate the risks of this volatile environment.
The webinar went some way into exploring the probable headwinds that may cause the most risk at this time. Among the most likely factors were labour disruption, further interest rate hikes, and cost increase pressures. Plant closures and logistics delays were also deemed likely. But, a glimmer of hope can be found in the fact that a recession is currently not anticipated.
Knowing what risks are prevalent is a good first step, but it’s vital for procurement professionals to know the best strategies when handling these risks. Our experts had an answer for that too, in the form of our AIM (Accelerated Inflation Mitigation) framework.
Incorporating The Smart Cube’s human and artificial intelligence, the framework accounts for changes in price, supply, and demand and provides guidance as to what procurement organisations should be doing now, what they should strategise next, and how they should build long-term resilience for the future.
Go beyond the summary
If you’d like a detailed run down of how individual commodities in both Food and Energy are expected to perform over the coming months, or if you’d like to learn more about how you can prepare for what’s next, watch the full webinar on demand, or get in touch to speak to one of our experts.