Drops in commodity prices worldwide have ‘hit a wall’ — that’s bad news for inflation: World Bank

The days of energy and other commodities serving as a deflationary force could be nearing an end, the World Bank warned, citing geopolitical tensions that have put pressure on demands for oil, industrial metals and other supplies.

Commodity prices have plateaued over the past 12 months, the World Bank noted in a report Thursday earlier reported on by the Financial Times.

It marks a change from the 40% drop global commodity prices experienced between mid-2022 and mid-2023 — led by oil, gas and wheat — which helped drive global inflation down some 2 percentage points within that year, FT reported.

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At the time, there was enough supply to meet demand.

However, as conflicts between Russia and Ukraine and in the Middle East have ramped up, so have the need for commodities such as oil, gas, agriculture and precious metals.

The World Bank is forecasting that prices will fall as little as 3% in 2024 and 4% in 2025, FT reported.

This would still leave prices about 38% higher than they were on average between 2015 and at the start of the pandemic in 2020, per FT.

“A key force for disinflation — falling commodity prices — has essentially hit a wall,” reiterated Indermit Gill, the World Bank Group’s chief economist and senior vice president.

“That means interest rates could remain higher than currently expected this year and next,” Gill added.

The Federal Reserve’s preferred measure of inflation on Friday showed that headline Personal Consumption Expenditures Price Index rose 0.3% last month, or 2.7% on an annualized basis — above expectations of 2.6%.

It also serves as cool comfort to the Fed’s 2% target goal, the World Bank noted, which is a figure the US economy has not seen in more than a decade.

The PCE figure was reported just one day after the Commerce Department reported that the US economy grew at its slowest pace in two years in the first quarter.

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Yet again, the data points did not serve well for rate-cut timing. Consensus among traders is that the Fed will now hold off until September before it slashes rates from their current 23-year-high, between 5.25% and 5.5%.

They are also predicting there will be two cuts of 25 basis points instead of the three that had been projected this year, totaling 75 basis points.

While most commodities are set to experience a slowdown, according to the World Bank’s forecasts, copper could still experience a rise in prices in the coming months as the metal is an important component in electric vehicles’ batteries and charging stations.

In the US, President Joe Biden has been gradually banning the sale of vehicles powered by gasoline or diesel fuel in an effort to make at least half of all new vehicle sales electric by the end of the decade.

Internationally, competition in China, in particular, has been revving up its investments in EVs, with automaker BYD even beating Tesla out late last year as the world’s top EV maker.

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The World Bank’s report also noted that tensions in the Middle East will send the cost of oil and gold higher, which is typical in times of conflict, FT reported.

The bank said it expects the price of Brent crude oil to average $84 a barrel this year — slightly higher than 2023’s average — before falling to $79 in 2025.

At the time of writing, Brent was trading just over $84 per barrel. The week prior, however, it topped $90 per barrel after a US official told ABC News that Israel launched retaliatory missile strikes against Iran earlier this month.

Gold, meanwhile, has also been spiking as the precious metal retains its value as a hedge against inflation.