WB: The world is facing the biggest commodity shock ever, that has  started to raise the specter of stagflation

ArmInfo.Food and energy price shocks due to war in  Ukraine could last for years. Shift to more costly trade patterns has  begun; transition to cleaner energy could be delayed. The war in  Ukraine has dealt a major shock to commodity markets, altering global  patterns of trade, production, and consumption in ways that will keep  prices at historically high levels through the end of 2024, according  to the World Bank's latest Commodity Markets Outlook report.

According to the source, the increase in energy prices over the past  two years has been the largest since the 1973 oil crisis. Price  increases for food commodities-of which Russia and Ukraine are large  producers- and fertilizers, which rely on natural gas as a production  input, have been the largest since 2008.  "Overall, this amounts to  the largest commodity shock we've experienced since the 1970s. As was  the case then, the shock is being aggravated by a surge in  restrictions in trade of food, fuel and fertilizers," said Indermit  Gill, the World Bank's Vice President for Equitable Growth, Finance,  and Institutions. "These developments have started to raise the  specter of stagflation. Policymakers should take every opportunity to  increase economic growth at home and avoid actions that will bring  harm to the global economy.

WB expects that, energy prices are expected to rise more than 50  percent in 2022 before easing in 2023 and 2024. Non-energy prices,  including agriculture and metals, are projected to increase almost 20  percent in 2022 and will also moderate in the following years.  Nevertheless, commodity prices are expected to remain well above the  most recent five-year average. In the event of a prolonged war, or  additional sanctions on Russia, prices could be even higher and more  volatile than currently projected.

Because of war-related trade and production disruptions, the price of  Brent crude oil is expected to average $100 a barrel in 2022, its  highest level since 2013 and an increase of more than 40 percent  compared to 2021. Prices are expected to moderate to $92 in 2023-well  above the five-year average of $60 a barrel. Natural-gas prices  (European) are expected to be twice as high in 2022 as they were in  2021, while coal prices are expected to be 80 percent higher, with  both prices at all-time highs.

"Commodity markets are experiencing one of the largest supply shocks  in decades because of the war in Ukraine," said Ayhan Kose, Director  of the World Bank's Prospects Group, which produces the Outlook  report. "The resulting increase in food and energy prices is taking a  significant human and economic toll-and it will likely stall progress  in reducing poverty. Higher commodity prices exacerbate already  elevated inflationary pressures around the world."

According to WB forecasts, wheat prices are forecast to increase more  than 40 percent, reaching an all-time high in nominal terms this  year. That will put pressure on developing economies that rely on  wheat imports, especially from Russia and Ukraine. Metal prices are  projected to increase by 16 percent in 2022 before easing in 2023 but  will remain at elevated levels.

"Commodity markets are under tremendous pressure, with some commodity  prices reaching all-time highs in nominal terms," said John Baffes,  Senior Economist in the World Bank's Prospects Group. "This will have  lasting knock-on effects. The sharp rise in input prices, such as  energy and fertilizers, could lead to a reduction in food production  particularly in developing economies. Lower input use will weigh on  food production and quality, affecting food availability, rural  incomes, and the livelihoods of the poor."

The Special Focus section of the WB report  offers an in-depth  exploration of the impact of the current War in Ukraine on commodity  markets.  It also examines how commodity markets responded to similar  shocks in the past. The analysis finds that the war's impact could be  longer-lasting than previous shocks for at least two reasons.

First, there is less room now to substitute the most affected energy  commodities for other fossil fuels-because price increases have been  broad-based across all fuels. Second, the increase in prices of some  commodities is also driving up prices of other commodities-high  natural-gas prices have raised fertilizer prices, putting upward  pressure on agricultural prices. In addition, policy responses so far  have focused more on tax cuts and subsidies-which often exacerbate  supply shortfalls and price pressures-than on long-term measures to  reduce demand and encourage alternative sources of supply.

The war is also leading to more costly patterns of trade that could  result in longer-lasting inflation. It is expected to cause a major  diversion of trade in energy. For example, some countries are now  seeking coal supplies from more remote locations. At the same time,  some major coal importers could step up imports from Russia while  reducing demand from other large exporters. This diversion will  likely be more costly, the report notes, because it involves greater  transportation distances-and coal is bulky and expensive to  transport. Similar diversions are occurring with natural gas and oil.  

In the near-term, higher prices threaten to disrupt or delay the  transition to cleaner forms of energy. Several countries have  announced plans to increase production of fossil fuels. High metal  prices are also driving up the cost of renewable energy, which  depends on metals such as aluminum and battery- grade nickel.

In its report, the World Bank urges policymakers to act promptly to  minimize harm to their citizens-and to the global economy. It calls  for targeted safety- net programs such as cash transfers, school  feeding programs, and public work programs-rather than food and fuel  subsidies. A key priority should be to invest in energy efficiency,  including weatherization of buildings. It also calls on countries to  accelerate the development of zero-carbon sources of energy such as  renewables.