The prices of some of the world’s most crucial commodities – food, fuels, plastics, metals – are skyrocketing. This is forcing consumers to cut spending and, if the trend strengthens, it could tip economies already rocked by the pandemic and war into recession.
The phenomenon occurs in large and small ways. Soaring natural gas prices in China are forcing fuel-burning ceramics factories to cut operations in half. European steel mills using electric arc furnaces are cutting production as electricity costs soar, making the metal even more expensive.
World food prices hit a record high last month, according to the United Nations, as Russia’s invasion of Ukraine disrupted shipments from countries that together supply a quarter of the world’s grain and a large part of its cooking oil. More expensive food can be frustrating for the middle class, but it’s devastating for communities trying to lift themselves out of poverty. For some, “demanding destruction” will be a bloodless way of saying “hunger.”
In the developed world, the tightening between rising energy and food costs could force households to cut back on discretionary spending. China’s decision to place its main steel hub under Covid-19 lockdown could limit supply and drive up prices of big-ticket items like appliances and cars. Electric vehicles from Tesla, Volkswagen and General Motors may be the future of transportation, except the lithium in their batteries is almost 500% more expensive than a year ago.
“Overall, this signals what could turn into a recession,” said Kenneth Medlock III, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
The International Monetary Fund is about to lower its global growth forecast because of the war, and it sees recession risks in a growing number of countries, said managing director Kristalina Georgieva. The global economy is expected to expand further this year, albeit less than the previously forecast 4.4%, Georgieva said in an interview with Foreign Policy magazine.
Federal Reserve Chairman Jerome Powell said Russia’s invasion of Ukraine was adding to inflationary pressures by driving up the prices of food, energy and other commodities “at a time already too high inflation”. Tackling high inflation is a top priority and the central bank stands ready to raise interest rates by half a percentage point at its next meeting if needed, he said.
The danger is more acute in Europe, where energy bills are soaring due to a reliance on Russian supplies. Natural gas prices on the continent are six times higher than a year ago and electricity costs almost five times more.
The UK lowered its economic forecast to 3.8% from 6%. The dynamic plays out in products as ubiquitous as petroleum and as specialized as lithium, a key ingredient in advanced batteries for consumer electronics and plug-in cars. Battery makers in China who are paying five times more for metal than a year ago are having to pass on some of that cost to automakers, which could slow electric vehicle sales.
Fertilizer makers, which use natural gas as a feedstock, began to scale back last year. Italy, Germany and the UK are planning to burn more coal next winter to reduce gas requirements in power generation. This would free up more fuel for industries, such as glassmakers and large steel mills, which cannot easily replace it.
Like gasoline, the demand for groceries in developed countries tends not to change much with price. Shoppers can change what they’re buying — ditching more expensive items for cheaper substitutes — but they still have to buy. Still, restaurants are finding rising prices a stumbling block as they try to revive business after Covid.