Collapsing commodity prices could flip global inflation into deflation – Societe Generale
From oil to metals to wheat, prices for natural resources have slumped from this year’s highs and the fast deceleration will likely lead what’s been a hot inflationary environment into a deflationary period in the coming months.
That’s the view from Societe Generale’s co-head of global strategy Albert Edwards who in a note published Thursday looked at the “stunning collapse” in the commodities complex over the past two weeks.
Copper, serving as a bellwether for economic health, tipped into a bear market in late June, highlighting fears that the global economy is heading into a recession.
The industrial metal has tumbled more than 20% since a recent high in May at around $4.35 a pound, and, “also most surprisingly,” agricultural prices have been part of the commodities rout, Edwards said. Corn prices have lost close to 30% from May’s high which touched $813 per bushel. Soybean and wheat have fallen by about 16% and 35%, respectively, in about two months.
“The long and the short of it is that US CPI food price inflation is set to collapse into [year over year] deflation, just as it did in 2008/9,” Alberts wrote in a Thursday note. “The same thing should happen with oil if there is a global recession despite the war in Ukraine.”
“And that will be the big surprise in the next six months. As commodity prices slump – reflecting the unfolding global recession – headline CPIs will collapse around the world, and with them the inflation narrative (although the reprieve might prove temporary),” he said. Such a move would likely trigger a drop in the US 10-year Treasury yield back below 1%. The yield was at 2.9% on Friday.
In the US, headline inflation in the world’s largest economy reached 8.6% in May, a 41-year high, largely on the back of soaring energy, shelter and food prices. The Census Bureau said the food index jumped 10.1% for the 12 months ending in May, the first increase of at least 10% since March 1981.
Inflation in the euro area also reached 8.6% in June and inflation was roaring higher throughout Asia. The Reserve Bank of Australia in July issued its third straight rate hike to tame inflation.
The Federal Reserve’s battle against rising consumer prices has prompted it this year to kick up borrowing rates from the starting point of 0% to a range of 1.25% to 1.75%, with another rate raise of either 50 basis points or 75 basis points likely at its July meeting.
There are signs investors are anticipating a slowdown in US inflation. Inflation expectations expressed through the 5-year breakeven rate this week fell to 2.5%, well off projections of above 3.5% in March.
Edwards pointed those who believe the collapse in commodity prices is driven by hedge fund speculative positions being closed to the CRB Raw Industrials Spot Index, which minimizes the influence of hedge fund speculative activity on that index. “It too has slumped,” he said.
West Texas Intermediate crude and Brent crude, the international benchmark, traded above $100 a barrel on Friday after each in recent sessions sank below that price.
“Oil prices this time last year were between $75-80 [per barrel], so it won’t take much of a fall from here to get into a yoy deflationary environment,” said Edwards.
