Commodities are becoming a headache for central banks once again. The price of a barrel of Brent crude oil has fallen back to $50, and the CRB index of global commodity prices is at its lowest in a dozen years. Central banks usually ignore the temporary impact of commodity price swings on consumer prices. But they have little room for complacency when inflation and policy rates are already so low.
Bond prices show recent commodity price declines are eroding investors’ fragile hope that inflation will accelerate. Benchmark 10-year U.S. and German yields have hit two-month lows this week. Granted, yields are influenced by various factors, including the supply of bonds, which tends to peter out over summer. However, the point is proved by falls in measures of how investors expect inflation to behave over a five-year period starting five years from now.
In the United States, this five-year/five-year forward gauge has fallen to 2.30 percent from July’s peak of 2.47 percent. The comparable euro zone measure has fallen to 1.75 percent from 1.86 percent over the same period. This is not the sort of slump which will panic either Federal Reserve Chair Janet Yellen or European Central Bank President Mario Draghi. But they won’t like the direction of travel.
Optimists can argue that cheaper fuel costs allow consumers to spend more on other things. But slumping commodity prices could also spur oil and mining companies to make even deeper cuts in investment, which would be a drag on economic activity. Global corporate capital expenditure is struggling to make headway, with capex in the energy and materials sectors expected to fall 14 percent this year, according to a survey by Standard & Poor’s.
Whether or not monetary policymakers think falling commodity prices are a problem, there is little they can do to influence them. Chinese growth rates matter far more. So do decisions by producers, be it of iron ore or oil, to ramp up or scale back supply. All Yellen, Draghi and their peers can do is try to cope with the resulting fallout with a very limited range of policy tools.