Understanding the Impact of Rising Commodity Prices on the Global Economy (2024)

FAQs

Understanding the Impact of Rising Commodity Prices on the Global Economy? ›

Inflation: Rising commodity prices can lead to higher inflation as producers pass on the increased costs to consumers. This can cause prices for goods and services to rise, reducing the purchasing power of consumers and leading to lower economic growth.

Theoretically, commodity prices affect a country's income through two channels, “income” and “cost” [8]. Commodity prices determine the value of the commodity and affects the demand for commodities used in agricultural and manufacturing industrial production.

An increase in commodity prices can affect the inflation ex- pectations of consumers to a greater extent than price increases of many other goods categories.

Effects on consumers

Rising commodity prices increase the cost of the goods made by producers who will, in turn, often pass on those costs to consumers.

Commodity money has some intrinsic value due to the content of precious metal it is made up of or backed by, but debasem*nt or increases in precious metal supply can cause inflation.

Commodities are raw materials used to manufacture consumer products. They are inputs in the production of other goods and services, rather than finished goods sold to consumers. In commerce, commodities are basic resources that are interchangeable with other goods of the same type.

Demand curves generally follow a pattern called the law of demandIncreases in price result in decreases in the maximum quantity that can be sold., whereby increases in price result in decreases in the maximum quantity that can be sold.

Commodities such as precious metals, agriculture goods, and oil & gas have often been touted as a portfolio diversifier that serves as a hedge against inflation.

In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

Yet food and energy costs represent major expenditures for consumers and businesses, and remain major contributors to household inflation.

What happens to commodity prices in a recession? ›

What happens to commodities in a recession? As a general rule, when economies slow, industrial outputs decline due to fewer infrastructure projects and house building, causing the demand for commodities to fall and prices to decline.

Rising shipping costs in 2021 contributed to the increases in the price of commodities, many of which are heavily traded and integral components of global supply chains. Maritime trade is considered the backbone of international goods trade, and high sea freight costs in 2021 disrupted global supply chains.

The main drawbacks of commodity money are: lack of store of value & lack of common measure of value & need of double coincidence of wants.

What Factors Affect the Price of Commodities Most? Supply and demand play a big role in the way commodities are priced in the market. When supply is low, demand is high, which leads to higher prices. Prices drop when the situation reverses—when supply is high and demand is low.

Prices of different commodities can vary, though all tend to be affected by factors such as production levels (supply) and consumer and business demand. Economic factors also tend to come into play. For instance, during global economic recessions, energy demand tends to subside, often driving prices lower.

It increases a country's vulnerability to economic shocks. This is because commodity prices adhere to market demand, which at global scales can fluctuate daily. For example, when there's a sudden drop in coffee prices, countries with commodity dependence on coffee experience major negative economic effects.

Such swings in commodity prices can weigh on long-term economic growth, especially for commodity exporters. For example, higher volatility in commodity prices may induce greater volatility in government finances in commodity exporting countries and thereby lead to stop-start public investment.

One of the main risks is price volatility. Commodity prices can be highly volatile, making it difficult for producers and consumers to plan and budget for their operations. This volatility can also create opportunities for speculators to profit from price movements, which can lead to market distortions.