Food and energy prices surged to near historic highs in recent years amid the pandemic and the war in Ukraine, which prompted major supply disruptions. This was accompanied by a sharp rise in the volatility of commodity prices as well.
Worryingly, the up-and-down swings in commodity prices will likely pose economic challenges in coming years. We explore the effects of volatile commodity prices in a new report on food and energy insecurity that was prepared for the Group of Twenty.
Specifically, we examine how economic growth and inflation are affected by volatility in commodity terms of trade—that is, the movement in the prices that a country pays for commodity imports and the prices it receives for commodity exports.
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. In turn, this would weigh on both physical and human capital investment.
What's more, volatility in commodity prices also appears to increase the volatility of domestic inflation over the medium term. This can occur, for example, as greater volatility in the price of imported goods passes through to domestic prices and thereby result in more volatile consumer inflation.
The challenges from heightened commodity price volatility come on top of the problems caused by the surge in price levels. World food commodity prices rose nearly 40 percent in the two years just before Russia’s invasion of Ukraine, and the war propelled prices even higher. Wheat prices jumped 38 percent in March 2022 from a month earlier. Energy prices rose sharply, with natural gas prices in Europe tripling. High energy prices also fed into record prices of commonly used fertilizers for food production.
