Volatile Commodity Prices Reduce Growth and Amplify Swings in Inflation

IMF Blog, March 28, 2023

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Resurgent volatility in commodity markets will likely pose economic challenges in coming years even as prices decline.
Volatility in commodity terms of trade—movement in prices a country pays for commodity imports and receives for commodity exports—affects economic growth and inflation.
Volatility can weigh on long-term economic growth, especially for commodity exporters, by inducing greater volatility in government finances and leading to stop-start public investment that undermines physical and human capital investment.
Volatility in commodity prices appears to increase the volatility of domestic inflation over the medium term through pass-through from imported goods to consumer prices.

World food commodity prices rose nearly 40 percent in the two years just before Russia’s invasion of Ukraine.
Wheat prices jumped 38 percent in March 2022 from a month earlier.
Natural gas prices in Europe tripled.
High energy prices fed into record prices of commonly used fertilizers for food production.
While international food and energy prices have moderated since their recent peak, they nonetheless remain elevated and have contributed to higher consumer prices and global economic hardship.
The World Food Programme estimates that 345 million people in almost 80 countries will face acute food insecurity this year—more than double the number in 2020.

For commodity exporters: volatility induces fiscal revenue swings, which can lead to irregular public investment and weaker accumulation of physical and human capital, lowering potential growth.
For domestic inflation: greater volatility in imported commodity prices can pass through into domestic prices, increasing consumer inflation volatility.

Monetary policy must remain focused on bringing inflation down.
Fiscal policy should aim for gradual and steady tightening to reduce pressure on monetary policy while supporting the most vulnerable.
Costly broad-based policies to mitigate higher commodity prices, such as price subsidies to limit pass-through to domestic prices, should be unwound and replaced by targeted measures to support vulnerable households.
- Unwinding broad subsidies helps avoid distortions that delay adjustments to higher energy prices.
- It preserves incentives for development of alternative green energy sources and supports fiscal sustainability.
- It improves distributional outcomes since energy subsidies tend to also benefit richer households.
Strengthen macro-fiscal institutions that can buffer commodity price volatility to minimize longer-lasting adverse effects.

Domestic actions should be complemented by multilateral efforts to address food and energy insecurity.
It is vital to sustain open trade in food.
Free flow of trade in metal and mineral inputs critical for the green transition would support energy security.

IMF Blog — Adil Mohommad, Mehdi Raissi, Kyuho Lee, Chanpheng Fizzarotti, March 28, 2023