Why commodity prices rise

In What commodity prices are saying about inflation , the writers question how much of the climb in commodity prices can be attributed to transitory, temporary shocks that should ease as the world's economy moves further from lockdown, and how much of the rise will last and spread to other things. In many markets, the factors driving up prices appear fleeting.

The economic reopening has been bumpy. Inventories are depleted, leading to big restocking orders and putting premiums on near-term deliveries of raw materials. Supply lines are jammed, creating pockets of scarcity and adding costs that are passed on to consumers. Lumber is a market in which demand is tied to interest rates and home prices. Prices for lumber soared to more than four times their normal level during the pandemic. Fiscal and monetary policies that have padded American bank accounts and kept money cheap have propelled the rise.

The Fed has stoked the hot housing market by holding interest rates to near zero, keeping mortgage payments low. Rising home prices and low rates have helped those who owned homes refinance and pocket cash without adding much to payments. Copper is closely linked to global growth because of its use in housing and electronics. Copper has never been more expensive. Record imports by China initially powered industrial metals higher. In the current context, in which economic revival co-exists with rising inflationary pressures, we pose ourselves the questions: how are prices of final consumer goods affected by the rise in commodity costs, and what impact does this have on developed and emerging countries?

In advanced economies, the relative weight of the food and energy components in the consumer price index is usually relatively contained. For the same reason, these fluctuations do not tend to have a decisive influence on medium-term inflation expectations, and this is what we have seen in recent months with the modest rise in inflation expectations see second chart.

Beyond the direct impact that commodities have on the various components of consumer price indices, it is also important to assess potential indirect effects. Thus, it is necessary to take into account how the cost of commodities contributes to the value added of final consumption goods and services. The situation in emerging countries is quite different, as their production and consumption models are more commodity-intensive. We therefore find that emerging Asia, for instance, is more exposed to commodity prices than the euro area or the US.

To Read the Full Story. Subscribe Sign In. Continue reading your article with a WSJ membership. Resume Subscription We are delighted that you'd like to resume your subscription. Please click confirm to resume now. In , some commodity prices rose to or exceeded levels not seen since the spike of For example, natural gas and coal prices reached record highs amid supply constraints and rebounding demand for electricity, although they are expected to decline in as demand eases and supply improves.

However, additional price spikes may occur in the near-term amid very low inventories and persistent supply bottlenecks. The use of crude oil as a substitute for natural gas presents a major upside risk to the demand outlook, although higher energy prices may start to weigh on global growth.

As global growth softens and supply disruptions are resolved, metal prices are forecast to fall 5 percent in , after rising by an estimated 48 percent in Following a projected 22 percent increase in , agricultural prices are expected to decline modestly next year as supply conditions improve and energy prices stabilize.

The production of some metals such as aluminum and zinc has been reduced due to high energy costs as well. More broadly, the events of this year have highlighted how changing weather patterns due to climate change are a growing risk to energy markets, affecting both demand and supply. From an energy transition perspective, concerns about the intermittent nature of renewable energy highlight the need for reliable baseload and backup electricity generation.