The relationship between commodities and inflation exists and affects different sectors. You may have noticed that the prices of products such as soybean oil and chocolate vary on the supermarket shelves, sometimes with significant increases.

The same happens when you fill up your car with gasoline: there are times when fuel prices are much higher than average. When there is a process of continuous increase in the prices of goods and services, a scenario of inflation is created.

Inflationary dynamics are influenced by different factors, such as changes in supply and demand. In the case of commodities, these shocks can lead to fluctuations in prices, which have varying impacts.

To explain how commodities and inflation are linked, we invited Alef Dias and Victor Arduin, Market Intelligence Analysts at hEDGEpoint.

Read on and check it out!

What is inflation? Understand the concept

Inflation is the generalized and continuous increase in the prices of goods and services in an economy over time.

It is therefore directly linked to people’s purchasing power and companies’ production costs. If prices grow faster than wages, purchasing power is reduced. In the case of companies, inputs become more expensive. These situations can lead to a decrease in demand, which affects sectors such as retail and services.

According to Victor Arduin, several central banks around the world divide inflation into two categories to better understand how it behaves:

• Inflation: also known as general inflation, it considers all the goods and services in a consumption basket. It therefore reflects the average percentage change in the prices of all items, without excluding specific components.
• Core Inflation: the technical term for core inflation, excludes certain volatile items that can distort the real inflation reading. Volatile items generally consist of food and energy products linked to the commodities sector. Prices can undergo significant short-term variations due to factors such as weather conditions and geopolitical events.

 Keeping inflation under control is a challenge for the monetary authorities, to promote a stable and sustainable economic environment.

What is the relationship between commodities and inflation?

After understanding the concept of inflation, you may have realized that it is closely related to products in the food and energy segments. Both depend on commodities such as soybeans, corn, sugar, and oil.

For Victor Arduin, one of the first points we need to analyze is the inelastic characteristics of agricultural and energy commodities:

Victor Arduin, Market Intelligence Analyst

“We can put off buying a house, for example. But we don’t give up the consumption of food or energy. Just think that we need gasoline to go to work. In general, these commodities are highly associated with inflation around the world,” he says.

Another important aspect is the fact that commodities have prices that vary daily, with very volatile products. In this sense, movements in their prices can have direct implications for inflationary dynamics. Alef Dias explains:

“Let’s think about energy. Practically every sector of the economy needs it. If energy commodities become more expensive, goods that depend on energy also become more expensive for industries, producers, and consumers. All this has repercussions on inflation.”

Read also:

• How does volatility impact the commodities market?

Producers: rising inflation leads to two main scenarios

In the case of commodity producers, the tendency is for profits to increase with the rise in prices, as the goods traded are more expensive. However, Alef Dias points out that the high inflation scenario could jeopardize another issue:

“Normally, most central banks raise interest rates to combat inflation. This makes it difficult for producers to access credit, which affects production planning,” he adds.

Commodities and inflation: examples of impacts throughout the global chain

The economy depends on a balance between supply and demand. When there are changes on either side, inflationary pressures arise, raising prices and causing consequences throughout the production chain at a global level.

Below, we have selected two world events that highlight the relationship between commodities and inflation due to variations in supply and demand.

1.    War in Ukraine

In 2022, the war brought the possibility of Russia interrupting the supply of natural gas to Europe, which caused inflationary pressure:

“In this scenario, the reduction in energy supplies from Russia has had an impact on the European economy, which is largely dependent on imports of energy commodities. These include oil and natural gas. At the same time, emerging economies that are growing and increasing their demand for commodities have also suffered from higher prices “, explains Arduin.

In the grains and oilseeds market, both Russia and Ukraine are important global producers. The geopolitical conflict has also had an impact on this market:

Alef Dias, Market Intelligence Analyst

“With export flows altered, there was a very large increase in the prices of corn and wheat, for example,” adds Alef Dias.

Read more:

• War in Ukraine: the main impacts on the commodities market

1.    US interest rate hike

Inflation affects a country’s interest rates. If inflation is high, central banks often raise interest rates to control price developments. This puts the cost of credit at risk of rising, which impacts on sectors that depend on financing.

This is the recent situation in the United States. In the country, higher interest rates have reduced the nation’s economic activity and had repercussions on various economies, as the dollar has become more expensive.

“For Brazil, for example, it is more expensive to buy commodities, because they are generally traded in US currency. As a result, the price of products that depend on these commodities rises. This is a concern which, combined with the risk of lower consumption by the US population, could considerably affect commodity export flows,” explains Arduin.

This is a worrying scenario for the entire planet, as it brings with it the risk of recession. Understand the issue in detail by reading our exclusive content:

• Interest rates and exchange rate variations: understand the relationship and impacts

hEDGEpoint: protection against price volatility in the commodities market

Various events bring about price variations in agricultural and energy commodities. With increasing globalization, the world is becoming more and more volatile. Risk is therefore inherent in the global commodities chain.

In this context, it is essential to manage risks. hEDGEpoint has sophisticated hedging instruments to protect against price volatility. We combine market intelligence, data analysis, and insights to help make assertive decisions.

We help the various players in this sector, such as producers, industries, and cooperatives. By managing risks, businesses gain competitiveness in a connected and changing world.

Talk to a hEDGEpoint professional to find out more.