The World Bank projects energy and other commodity prices to become significant deflationary factors in the coming years, posing challenges for central banks aiming to implement interest rate reductions.
In a recent report, the multilateral lender highlighted the stabilization of commodity prices after a substantial decline observed over the past two years.
This stabilization is attributed to tightening supplies due to geopolitical tensions and increased demand for industrial metals and those utilized in the energy transition.
According to Financial Times News, global commodity prices experienced a notable decrease of 40% between mid-2022 and mid-2023, impacting commodities such as oil, gas, and wheat.
Consequently, global inflation saw a reduction of approximately 2 percentage points during this period. However, over the past year, prices have plateaued, putting an end to this deflationary pressure.
Indermit Gill, Chief Economist and Senior Vice-President of the World Bank Group, noted, “Global inflation remains undefeated,” said Indermit Gill, 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”.
The bank forecasts that commodity prices will fall by as little as 3% in 2024 and 4% in 2025.
However, this slowdown in price falls will do little to quell above-target inflation and may pose challenges for central banks wanting to bring down interest rates.
The World Bank Group’s deputy chief economist, Ayhan Kose, highlighted the significance of high commodity prices amid slowing global growth, marking the start of “a new era,” comparable to the aftermath of the 2008 global financial crisis.
While most commodity prices are expected to decrease at a slower pace, the bank forecasts a rise in the copper rate due to the energy transition’s demand for the metal, essential for manufacturing electric cars and upgrading the electricity grid.
Additionally, tensions in the Middle East are forecasted to push up the cost of gold and oil. The bank expects the price of Brent crude oil to average $84 a barrel this year and $79 in 2025.
However, if the conflict in the Middle East escalates, oil prices could surpass $100 per barrel this year, leading to a significant global inflationary impact.