SOCIO-ECONOMIC VOICES

"Correction in international commodity prices seen softening inflationary pressures"
-Dr. S P Sharma,Chief Economist, PHDCCI
"Effective measures undertaken by central banks of key economies have potential to pull inflation into comfort zones"

Inflation has become a point of concern since the last many quarters after the onset of geo-political developments in Russia and Ukraine. Spread of inflation across advanced, emerging and developing economies has created challenges to their respective economic growth rates and to the global economic growth trajectory as well.

Due to the ongoing geo-political disturbances in the world economy, the prices of essential items such as crude, wheat, sugar, among others have become exorbitant. This has led to the scarcity of such products and escalation in the costs of imports for the countries which are heavily dependent on such international commodities.

Presently, India depends on imports to meet up around 80% of its crude oil needs. The surge in international oil prices has resulted in broader price pressures. As manufacturing costs increase as a result of increased input and transportation/logistics costs, resulting in higher inflation in both WPI and CPI.

However, over the months (March-August), the prices of five broad industrial commodities, including Steel, Copper, Nickel, Aluminum, and Crude Oil, that are key sources for the manufacturing industry, have started deceleration. Earlier, the prices of these industrial commodities were continuously rising due to the Covid-19 pandemic and geopolitical developments around the world.

But with the pace of time, global prices of 5 major commodities have fallen to around 30% during the March 2022 to August 2022 from highly-elevated levels. This deceleration will be helpful for the manufacturing industries, which were impacted by the sharp spikes in the international inputs prices.

International Industrial Commodity Prices
S.no Name of the Commodity Prices (USD per tonne/barrel) March 2022 Prices (USD per tonne/barrel) on 2nd May 2022 Prices (USD per tonne/barrel) on 29th July 2022 Prices (USD per tonne/barrel) on 29th August 2022 Prices (USD per tonne/barrel) on 16th September 2022 % Change (March-August 2022)
1 STEEL (HRC Platts) 1502 1395 862 824.2 812.3 -45.1%
2 Copper 10,230.9 9,820 7,800 7,981 - -22.0%
3 Nickle 33,924.2 32,420 22,050 22,057 - -35.0%
4 Aluminium 3498.4 2,911.00 2,488.00 2359 2275 -32.6%
5 Crude oil (Per barrel) 117.3 107.5 100.3 100.45 91.58 -14.4%
Average of 1 to 5     -29.8%

Source: PHD Research Bureau, PHD Chamber, compiled from various sources.

The effective measures undertaken by our Government and Reserve bank of India are becoming visible as inflation in both WPI and CPI segments has come significantly down from its peak in the months of April- May 2022 with the deceleration in prices of many key commodities which are expected to returning back to the pre pandemic level. India has followed calibrated approach and undertaken a moderate monetary policy tightening. The positive sign of this decision of India’s central bank is evident from declining inflationary trends, wherein the WPI inflation has come down to 12.4% in August 2022 from its peak of 16.6% in May 2022 and CPI inflation has fallen to 7% in August 2022 from its peak of 7.79 in April 2022. The deceleration in WPI and CPI has come in tandem with the significant correction in the key international commodity prices such as crude oil and steel.

Movement in WPI and CPI in India

WPI

CPI

International crude oil prices

International steel prices

Source: PHD Research Bureau, PHD Chamber, compiled from various sources.

WPI & International Steel Prices

Source: PHD Research Bureau, PHD Chamber, compiled from various sources

Governments and central banks around the globe are trying to tackle heightened inflationary risks in synchrony with raising interest rates, amendments in duty structures, etc., thus, maintaining a delicate balance of consequences for economy, trade and finance amid current geo-political scenario. Going ahead, increase in interest rates by many economies will have further impact on international commodity prices as cost of inventory carry by speculators is going up. In India, inflation is expected to decelerating further on the back of effective measures by the government such as rationalization of excise duties in key international commodities and effective measures undertaken by the RBI though there will be some impact on private consumption demand in the short run. However, in the medium to long term the economic growth prospects would remain intact and economy will remain one of the fastest moving economy among the leading economies.

In conclusion, price stability is one of the key objectives of every macroeconomic policy formulation in an economy, as it helps to stabilize nominal interest rate, thereby promoting higher investments and higher economic growth trajectory. The increase in both WPI and CPI inflation was majorly on the back of upward pressure created on crude oil prices and other international commodity prices by the ongoing geo-political conflict and its economic implications. Going ahead, the measures such as strengthening of the global value chains and shifting of the sources of the imports from higher price countries to low price countries; import substitution for the technology intensive and labour-intensive products where there India has higher imports; enhancing indigenous production possibilities where there is high demand for the commodities and last but not least the measures for preventing hoarding of the essential commodities to stop price accelerations would go a long way to stabilize the price pressures and bring down the inflation into comfort zones in the coming times.

(Dr. S.P. Sharma is Chief Economist & Director of Research • PHDCCI (PHD Chamber of Commerce and industry, India)

Disclaimer: The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of Indiastat and Indiastat does not assume any responsibility or liability for the same.

indiastat.comSeptember, 2022
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