Has inflation finally peaked?

Key commodity prices have come down from their peaks following the outbreak of war in Ukraine, but we may not be over the worst of it yet.

Inflation has been perhaps the biggest economic issue facing the world in 2022. After decades of relatively low inflation, price increases have reached their highest level since the early 1980s, heading into double digits in the UK in July and predicted to reach more than 13 percent by autumn.

However, inflation may be approaching its peak with a number of key commodities seeing price falls in recent months. After war broke out in Ukraine in February, commodities like wheat, oil, gas and metals all spiked due to concerns that a new cold war between Western countries and Russia could lead to a breakdown in supply lines for industry and consumers.

Brent crude peaked at $139.13 per barrel on 7 March but has now fallen to around $91 per barrel. This has been reflected in falling prices for petrol and diesel fuels which have impacted consumers and business alike.

Copper is down around 25 percent since it peaked and iron ore prices have dipped by 50 percent from their March peak. Wheat prices were particularly impacted due to Ukraine being a major producer surging to $13.63 per bushel, but have now dropped to around $8, the price it was trading at prior to the war.

All this spells good news for central bank policymakers who are trying to rein in inflation and have made numerous interest rate rises so far in 2022. While it is expected rates will continue to increase through this year to try and bring price rises down to more manageable levels, the improving picture in commodity markets may allow central banks to take a more dovish approach.

That said, the threat of inflation has not gone away. With the war in Ukraine showing little sign of letting up, it could still limit the extent to which prices can fall and some regions such as Europe face a difficult winter due to their reliance on Russian gas supplies to keep the lights on. Energy bills have been a key concern with many businesses and consumers seeing their energy costs double or even triple in the past 12 months, and warnings of further price rises to come.

Labour markets too are set to continue contributing to inflationary pressure. In the UK alone, it is thought more than 1 million people left the workforce since the covid-19 in 2020, with many opting for early retirement while others decided to commit more time to their families. Many industries are now facing a shortage of workers and are having to pay more to hire suitably qualified staff. Existing workers are also demanding more pay to help them meet the costs of day-to-day spending that have soared since January this year.

For private credit investors, it appears the worst of the inflationary spike may be over but rates are going to continue to rise and that means defaults are likely to be headed higher too. Consumer spending is also being hampered by the high costs of essentials like food, fuel and energy (as well as debt repayments) which will all act as a drag on growth. While the worst of the storm may have passed, markets face an unsettled period ahead, which will require fund managers to act more cautiously in how they deploy investors’ money.