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Energy and other commodity prices are unlikely to continue to be a major deflationary force in the coming years, according to the World Bank, hampering central banks in their efforts to cut interest rates.
The multilateral lender said in a report on Thursday that the sharp decline in commodity prices over the past two years had come to a halt, as geopolitical tensions tighten supplies and demand for industrial metals and those used in the energy transition continues to grow.
Global commodity prices tumbled 40 per cent between mid-2022 and mid-2023, with oil, gas and wheat among those falling sharply. That helped drive down global inflation about 2 percentage points over that period, according to the bank.
But over the past year prices have plateaued, according to the World Bank’s index, putting an end to this deflationary pressure.
“Global inflation remains undefeated,” said Indermit Gill, the World Bank Group’s chief economist and senior vice-president. “A key force for disinflation — falling commodity prices — has essentially hit a wall. That means interest rates could remain higher than currently expected this year and next.
“The world is at a vulnerable moment: a major energy shock could undermine much of the progress in reducing inflation over the past two years,” he added.
The bank forecasts that commodity prices will fall as little as 3 per cent in 2024 and 4 per cent in 2025. That would still leave prices about 38 per cent higher than they were on average between 2015 and the start of the coronavirus pandemic in 2020.
This slowdown in price falls will do little to quell above-target inflation and creates a problem for central banks wanting to bring down interest rates, according to the report.
“The big deal” was that commodity prices were staying high while global growth slowed, Ayhan Kose, the World Bank Group’s deputy chief economist, told the Financial Times.
This divergence marked the start of “a new era”, Kose added, noting that the last time this happened was in the wake of the 2008 global financial crisis.
While most commodities are still set to come down in price but at a slower pace, according to the bank’s forecasts, copper is set to rise as the energy transition spurs demand for the metal, which is essential for manufacturing electric cars and upgrading the electricity grid.
Double-digit growth in global energy investment “brings additional pressure on the demand side, keeping prices higher”, said Kose. Demand in China had also been more robust than expected, he added.
The report also forecasts that tensions in the Middle East will push up the cost of gold — seen as a haven in times of conflict — and oil. The bank expects the price of Brent crude oil to average $84 a barrel this year, slightly higher than last year’s average, and $79 in 2025. On Thursday, Brent was trading at about $88 a barrel.
Commodity prices could be even higher if conflict in the Middle East escalates, however, the report added. “Those tensions bring a certain premium, especially in the context of the price of oil, and also bring more frequent price movements,” said Kose.
The bank forecasts that, if the conflict intensifies in a worst-case scenario, oil prices could blast through $100 per barrel this year. Such a sharp rise would push up overall global inflation nearly 1 percentage point, it said.