Global commodity prices are leveling off after a steep descent that played a decisive role in whittling down overall inflation last year, which could make it harder for central banks to cut interest rates quickly, according to the World Bank’s latest Commodity Markets Outlook. The report also finds that a major outbreak of conflict in the Middle East could halt the inflationary decline that has occurred over the past two years.
"Global inflation remains undefeated," said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President. "A key force for disinflation—falling commodity prices—has essentially hit a wall. That means interest rates could remain higher than currently expected this year and next. The world is at a vulnerable moment: a major energy shock could undermine much of the progress in reducing inflation over the past two years."
The World Bank's forecasts indicate that Brent crude oil prices will average $84 per barrel in 2024 before declining to an average of $79 in 2025, assuming no conflict-related supply disruptions. However, if the conflict in the Middle East were to escalate further, oil-supply disruptions could push up global inflation.
"A striking divergence is emerging between global growth and commodity prices: despite relatively weaker global growth, commodity prices will most likely remain higher in 2024-25 than in the half-decade before the COVID-19 pandemic," said Ayhan Kose, the World Bank Group’s Deputy Chief Economist and Director of the Prospects Group.
An escalation of the conflict in the Middle East could also drive up prices of natural gas, fertilizers, and food, the report notes. The region is a crucial gas supplier, and if the LNG supply were interrupted, fertilizer prices would also rise substantially, likely driving up food prices.
"Central banks must remain alert about the inflationary implications of commodity-price spikes amid elevated geopolitical tensions," Kose added.
The report also highlights the impact of accelerating investment in green technologies on the prices of key metals critical for the global clean-energy transition. Prices of copper, necessary for electricity-grid infrastructure and electric vehicles, are expected to rise 5% in 2024 before stabilizing in 2025. Prices of aluminum are forecast to rise by 2% in 2024 and 4% in 2025, bolstered by the production of electric vehicles, solar panels, and other renewable-power infrastructure.
In conclusion, the World Bank's Commodity Markets Outlook warns of the potential consequences of a major flare-up in the Middle-East conflict on global inflation and commodity prices, urging central banks to remain vigilant in the face of heightened geopolitical tensions.
The full report can be accessed at: [Commodity Markets Outlook - Spring 2024](https://bit.ly/CMO_Spring2024_FullReport).