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Our Materials Price Index (MPI) declined 1.1% last week, ending
a five-week streak of increases. Although commodity markets have
become choppy recently, declines were not widespread last week -
only four of the MPI's ten subcomponents fell. Commodity prices as
measured by the MPI are still up 13.5% year-to-date.
The largest declines were in lumber and chemicals. North
American lumber prices fell 13.1% as the lingering effects of
February's cold weather and high prices weighed on demand. Despite
the large drop, lumber prices remain 172% higher than a year ago.
Chemicals prices followed crude oil prices down. Although the
energy component of the MPI increased last week, the rise was
driven by coal and natural gas prices. Crude oil prices fell 2.2%
for the week, with chemicals dropping 2.1%. The downward slide in
oil prices was mostly a factor of pared back expectations for a
quick demand rebound. This change reflects new widespread lockdowns
in Europe that cast doubt on how quickly transportation activity
will recover. In addition to the drop in oil prices, weakening
sentiment in Northeast Asia added to the drop in chemicals prices,
with the ethylene market facing both buyer resistance and
increasing supply. Elements of the MPI showing strength last week
included freight, with rates increasing 6% and DRAMs prices, which
increased 3.2%. Strong demand and tight supply continue to support
prices in both categories.
As vaccine rollouts continue,
enabling a recovery in the global economy, inflation risks are
increasing. The bad news is that the past year of rising commodity
prices already ensures higher goods price inflation this summer.
Whether this burst of inflation is prolonged or only temporary will
depend on how quickly problems in production and with logistics
services are resolved. At the moment, supply chains are fragile and
a source of upside price risk. But assuming
disruptions and bottlenecks fade as the pandemic recedes, markets
look to be in a better balance by the end of the year with cost
pressures becoming manageable even as a broader recovery gains
traction.
Posted 24 March 2021 by Thomas McCartin, Senior Economist, Pricing & Purchasing, IHS Markit
