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Our Materials Price Index (MPI) fell 2.9% last week, a further
decline after the previous week's near record price drop. Declines
were again widespread with all ten MPI sub-components falling for
the second week in a row. While aggregate inflation measures
continue to draw justifiable attention, commodity markets have been
signaling a change upstream in supply chains since May. The
correction has been modest to date, but if it persists (which IHS
Markit believes it will, this change points to cost pressures in
goods markets ebbing as early as the first half of 2022.
Declines in energy, steel and freight prices were most notable
last week. Global natural gas prices continued to retreat from
record highs and dropped 7.6%, their fifth consecutive weekly
decline. European prices, which had seen the greatest increases
recently, dropped 9% last week after data showed that Russian gas
imports to Europe were increasing. Given that storage levels in
Europe are at ten-year lows this supply boost was well received and
brought price relief to the market. Power rationing and mandated
cuts in production for many heavy industries as part of China's
'Dual Control' policy continued to create problems in steel
markets. Steel production in mainland China has dropped by more
than 20% in recent months, triggering a plunge in iron ore prices.
Prices fell to $92 a tonne last week, an 18-month low, having been
as high as $220 a tonne in May. Lower iron ore prices have
translated into lower shipping costs with prices for transporting
ores from Australia and Brazil to mainland China down 12.7% last
week.
The now six-month correction in the MPI contrasts with rising
consumer price inflation in every economy. US inflation, as
measured by the Consumer Price Index, reached 6.2% year over year
in October, its highest rate in three decades. Other advanced
economies and many emerging markets are seeing top-line consumer
price inflation rise as well, prompting debate about how transitory
this bout of rising prices will be. To be sure, cost pressures in
goods markets remain acute. Commodity prices, however, look
increasingly like they hit their high-water mark in the current
price cycle some months ago. Moreover, the correction in
commodities shows signs that it will continue into 2022, which if
true, will soon begin to alleviate pressure on at least goods
prices.
Posted 17 November 2021 by Michael Dall, Associate Director, Pricing and Purchasing, S&P Global Market Intelligence
