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Stagflation risk mounts as commodity prices soar

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“The US is heading for stall-speed growth on the back of various factors [and] Europe is headed for worse outcomes, notwithstanding the ECB’s currently optimistic forecasts. So, the big two economies in aggregate are not looking at much expansion, while inflation is elevated.”

Key global commodities have spiked this quarter: wheat prices are already up more than 40 per cent since the start of the year. Ukraine and Russia alone account for 29 per cent of international wheat sales annually.

Meanwhile, Brent crude is still up more than 40 per cent, even after retreating from a high of $US139 a barrel at the start of the week. The May Brent contract was down 0.1 per cent to $US109.19 a barrel on Friday.

European gas prices have more than doubled since the start of the year despite coming off record highs through the week.

AT short-squeeze in nickel sent the LME price of the commodity parabolic, rising by 130 per cent since the start of the year. Nickel is a key component of stainless steel, electrical inputs and lithium batteries.

“The US CPI will potentially pass 9 per cent in the following months as it has yet to fully account for the spike in global commodity prices and the broader implications of wide-reaching sanctions against Russia,” said Cameron McCormack, portfolio manager at VanEck.

“Stagflation is now a possibility. Investors need to prepare for this scenario.”

At Thursday’s meeting, the ECB left its deposit and main refinancing rates on hold, but announced it would wind down its asset purchase program faster than previously forecast.

The ECB could end its asset purchase program by the third quarter, and pledged to do whatever action was needed to fulfill its mandate.

The ECB also significantly upgraded its 2022 inflation forecasts, expecting consumer prices to rise by 5.1 per cent instead of the 3.2 per cent it previously projected.

But the toll on GDP growth is already apparent this quarter, and it now expects the economy will grow by just 3.7 per cent in 2022, down from a previous forecast of 4.2 per cent.

“The risks to the economic outlook have increased substantially with the Russian invasion of Ukraine and are tilted to the downside,” said ECB president Christine Lagarde during a press conference on Thursday.

“While risks relating to the pandemic have waned, the war in Ukraine will have a stronger impact on economic sentiment and could worsen supply-side constraints again.”

Economists in Australia have also begun to downgrade their expectations for growth, while increasing their expectations for inflation.

Goldman Sachs is forecasting headline CPI to hit 5.3 per cent year-on-year by the second quarter, driven by higher fuel prices and flood-related disruptions to food supplies.

But the surge in commodity prices is set to weigh on domestic economic growth in 2022: Goldman downgraded its forecast for GDP growth for the year by 30 basis points, or 0.3 of a percentage point, to 3.6 per cent.

CommSec on Monday forecast petrol at the pump will exceed $2 a litre. Every $US1 change in the crude price is roughly equivalent to one Australian cent at the pump, it said, all things being equal in foreign exchange and refining markets.

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