World Bank Projects Elevated Energy, Food Prices, Keeping Upward Pressure on Inflation

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Global energy costs are expected to jump more than 50% this year, food prices to climb 22.9%

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In its latest Commodity Markets Outlook report, the multilateral bank said that energy prices will soar 50.5% this year from last, after nearly doubling in 2021. The World Bank expects energy prices to then fall 12.4% in 2023. Food prices are projected to rise 22.9% this year before declining 10.4% next year. Food prices rose 31% last year.

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Increases in energy prices over the past two years have been the most significant since the early 1970s. The price increases for food commodities such as wheat and cooking oil—of which Ukraine and Russia are large producers—have been the largest since 2008, the World Bank said.

“The resulting increase in food and energy prices is taking a significant human and economic toll,” said Ayhan Kose, director of the World Bank’s Prospects Group. “It will likely stall progress in reducing poverty…exacerbate already elevated inflationary pressures around the world.”

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Commodity prices were rising even before the war. As demand rebounded from the Covid-19 pandemic-induced slumps, supplies didn’t increase as much because of supply-chain disruptions and several years of weak investment.

Citing the Ukraine war’s impact on energy and food prices, the International Monetary Fund last week unveiled sizable cuts in its forecast for economic growth for 2022 and 2023. The multilateral group now sees global growth slowing to 3.6% this year from 6.1% last year, a downward revision of 0.8 percentage point from its January projection. Its outlook for next year was cut by 0.2 point to 3.6%.

The higher energy and commodity prices are helping to push up inflation in many countries, with the US consumer-price index surging to a four-decade high of 8.5% and euro area annual inflation rising to a record high of 7.5% in March.

The impact of rising food and energy prices are even more dire in many developing nations, sending protesters to the streets and creating debt stress for governments.

“Accelerated inflation has become a clear and present danger for many countries,” IMF Managing Director Kristalina Georgieva said during a press conference last week. “Rising food and fuel prices are straining the budgets of ordinary families to a breaking point.”

As new supplies come onstream, prices of many commodities are likely to ease. Yet, the World Bank warns that prices are likely to remain at high levels in 2023 and 2024 for several reasons.

Following the large and broad-based price increases over the past year, there is less scope for substitution. For example, crude-oil buyers hit by high prices can’t easily shift to natural gas or coal because their prices have also increased sharply.

And the price increases of some commodities have resulted in higher prices for other commodities by raising their production costs. A case in point: Higher energy prices pushed up the costs of fuel and fertilizers needed for food production, causing rises in the pieces of wheat and other agricultural products.

Furthermore, many governments have responded to higher fuel prices with tax cuts and subsidies. Such policies may alleviate short-term price increases, but they tend to keep demand strong, causing prices to remain elevated, the World Bank says.

“While the outlook for commodity markets depends heavily on the duration of the war in Ukraine and the extent of sanctions, it is assumed that the channels through which commodity markets have been affected are likely to persist,” the World Bank said in the report.

The price of oil and wheat, for example, is expected to ease in 2023 and 2024, but not fall back to previous levels.

Brent crude futures were trading around $102 a barrel Monday, after falling from a high of $127.98 in late March, following announcements from the US and others that they would tap their strategic reserves. Those prices are well up from 2021’s annual average of $70.40, which was roughly in line with prepandemic levels. The downward shift for the coming years will be less steep, the World Bank projects, with the price falling to an average of $92 a barrel in 2023 and $80 in 2024.

The price of the benchmark hard-red winter wheat is forecast to ease from the peak of $450 a metric ton this year to $380 and $370 in 2023 and 2024, respectively, the World Bank said. Yet, those prices are higher than the $315 of 2021 and $232 of 2020.

Write to Yuka Hayashi at [email protected]


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