A surge in commodity prices around the world is raising concerns of higher inflation alongside weaker economic growth.
Brent futures, the international benchmark, rose 6.8% to $112.12 a barrel on Wednesday, extending their lead so far this year to 44%. Wheat prices rose to their highest level since 2008. Aluminum and nickel prices also rose.
Rising commodity prices are the latest wild card for investors at a time when inflation has already hovered at a 40-year high. Now some analysts are warning that economic growth could slow as prices rise. This happened in the 1970s, when the combination of weaker economic growth and higher inflation, or stagflation, weighed on stock market returns.
“Russia/Ukraine raises risk of stagflation” and central bank policy error, Bank of America analysts wrote in a recent note to clients.
Fitch Ratings analysts warned on Tuesday that inflation could remain elevated throughout the year, weighing on the global economy and increasing the risk of recession.
“Global energy price shocks related to the Russia-Ukraine crisis heighten risks,” the analysts wrote in a report. “If underlying inflation remains high and inflation expectations increase, the Fed and the [Bank of England] may have no choice but to quickly move rates to neutral or restrictive levels.
It is unclear how the Federal Reserve will respond to geopolitical risks. Investors largely abandoned the idea of a half-percentage-point rate hike at the March meeting after Russia invaded Ukraine. Many are instead betting on a quarter-percentage-point increase, according to data from the CME Group. Traders also lowered their expectations for the number of rate hikes there could be in 2022.
Federal Reserve Chairman Jerome Powell said in testimony prepared for delivery Wednesday that it would be appropriate for the central bank to raise rates when it meets in two weeks.