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Commodities upswing underway … higher and higher

Paul Bloxham, Chief Economist, Global Commodities and Jamie Culling, Economist, Global Commodities

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Global commodity prices are in an upswing, and we think they have passed the trough for the cycle. Demand appears to be lifting and the supply-side is 'super-squeezed'. So, what's next? HSBC’s Paul Bloxham and Jamie Culling explore.

Different drivers mean different implications for growth, inflation and interest rates. As we have noted before, if commodity prices stay high, they are likely to contribute to the ‘sticky’ inflation challenge.

And, as we have noted before, we can see good reasons for this. Demand indicators have started to pick-up as the global industrial cycle is turning more positive. Copper prices, which are often seen as a timely indicator of the industrial cycle, have picked up strongly. The supply-side for commodity markets is constrained by persistent factors – including geopolitics, climate change and the energy transition – in what we have been calling a ‘super-squeeze’.

The striking thing about the upswing in commodity prices, then, as Chart 1 shows, is that commodity prices were already high, but they are moving even higher!

But are they really that high?

Maybe not.

Yes, they are high in nominal terms, but in real terms, they are around the historical average (Chart 2).

Breaking this down a bit further. By nominal terms, we mean USD terms (a standard benchmark). But the recent burst of high consumer price inflation has meant that US dollars now buy less goods and services than they used to. On the other hand, commodities buy as many other goods and services as they have done in the past on average.

This, of course, largely reflects the recent surge in CPI inflation.

Because we have not had high inflation for many decades, the effect is quite unfamiliar.

But here’s the kicker.

Because central banks target inflation, not the price level, it seems unlikely that the price level will return back down to its previous trend any time soon.

Commodity prices too, may therefore stay at a new higher nominal level.

Different drivers mean different implications for growth, inflation and interest rates. As we have noted before, if commodity prices stay high, they are likely to contribute to the ‘sticky’ inflation challenge.

1. Commodity prices have been in an upswing since mid-February

Source: Bloomberg; HSBC

2. Real commodity prices are around their pre-pandemic average

Source: IMF; Bloomberg; HSBC estimates

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