The article begins by taking note of the recent surge in global commodity prices. This rise has been so significant that it’s being described as a new commodity super cycle. Essentially, a commodity refers to a fundamental good that can be substituted with goods of similar types. Commodities are predominantly utilized as production inputs for various goods and services.
Understanding a Commodity Super Cycle
A commodity super cycle is identified as an extended duration of unusually robust demand growth that manufacturers find difficult to match, leading to a rise in prices that can span years or even decades.
The Present State of Global Market
Currently, the surge in prices is quite evident in various sectors. Metals, especially steel which is a principal component in construction and diverse industries, have seen a steep rise in prices. Agricultural commodities such as sugar, corn, coffee, soybean oil, and palm oil have also exhibited a significant upswing in the US markets, which subsequently impacts domestic markets as well.
Triggering Factors of the New Commodity Super Cycle
This new commodity super cycle is largely driven by a revival in global demand, spearheaded by economic recoveries in China and the US. Other pertinent factors include supply-side constraints, the loose approach of global central banks towards monetary policy, and investments directed towards asset creation. Investors are now trending towards assets that provide a shield against potential inflation, thereby driving the price escalation.
Consequences of the Surge in Prices
The persistent increase in input costs has become a growing concern. It could affect infrastructural development in nations like India, due to increased costs, and also impact overall inflation, economic recovery, and policy formulation initiatives. Regulatory bodies may face the challenge of dealing with higher Wholesale Price Index (WPI) inflation caused by soaring metal prices, thereby making the reduction in core inflation a difficult task.
Explaining Monetary Policies
Monetary policies can be divided into two types – loose and tight. A loose or expansionary monetary policy refers to lowering of interest rates to boost borrowing, while a contractionary or tight monetary policy pertains to increasing interest rates to decrease borrowing.
The Definition and Impact of Inflation
Inflation could be defined as an increase in prices of most commonly used goods and services. It signifies a decrease in the purchasing power of a country’s currency unit, leading to possible economic slowdowns. However, moderate inflation is necessary to promote production in an economy. In India, inflation is predominantly measured through two indices – WPI and CPI.
Understanding Core Inflation
Core inflation denotes the cost changes associated with goods and services excluding those from the food and energy sectors, as they tend to be more volatile. It is crucial in gauging the impact of escalating prices on customer incomes.
The Way Forward
To cope with this challenging situation, planners need to examine the supply and demand discrepancies, and decide on the sectors that need initial investment and incentives, like the Production-Linked Incentive (PLI) Scheme. This proactive approach will prepare them to handle the ongoing commodity super cycle effectively.
