The war in Ukraine will keep commodity prices at historically high levels at least until the end of 2024, including for food, according to a new report from the World Bank. The institution fears for an age of stagflation.
Biggest shock since 1970s
Food and energy prices could remain high for years to come, the World Bank warns (again). Since the oil crisis in the 1970s, commodity prices have never again risen so sharply, but now the effects of the war in Ukraine and energy prices are amplifying each other. Price increases for food commodities – of which Russia and Ukraine are major producers – and fertilisers are already the largest since 2008.
“Overall, this is the biggest commodity shock we have experienced since the 1970s. As then, the shock is being exacerbated by a sharp increase in trade restrictions on food, fuel and fertilizers”, said Gill Indermit, vice president of the World Bank in New York. “These developments are beginning to raise the specter of stagflation.”
Wheat 40 % more expensive
Wheat prices would rise by more than 40 % and reach a record high this year. That will put pressure on developing economies that depend on wheat imports, especially from Russia and Ukraine. Metal prices are expected to rise 16 % in 2022 and decline in 2023, but remain at high levels.
“This will have lasting knock-on effects. The sharp rise in input prices, such as energy and fertilizers, could lead to a decline in food production, especially in developing economies. Using fewer inputs will reduce food production and quality, as will food availability,” said John Baffes, senior economist in the World Bank’s forecasting group.
Rising food and energy prices go hand in hand and cannot be separated, the World Bank states. Because they are so closely intertwined, things are not likely to improve. On the contrary, global trade, production and consumption patterns have been changed by the shock to such an extent that the effects will persist until the end of 2024.
First, costs are rising so much that there are little resources left to switch to other energy sources, fossil or cleaner. The transition to more sustainable energy may be delayed. Second, the rise in prices of some commodities also drives up the prices of other commodities: high natural gas prices have driven up fertiliser prices, which in turn drive up agricultural prices. Moreover, government responses so far – especially tax cuts and subsidies – just exacerbate supply shortages and price pressures.
The war is also leading to more expensive trade patterns that could lead to longer inflation. No grain from Ukraine? Then companies look at China or other more distant locations. This diversion of trade is likely to be more expensive, the report says, because it involves greater transportation distances.