Is the Spike in Commodity Prices Sustainable?

It’s just one example of how the global economy is being disrupted by Russia’s invasion of Ukraine. Russia provides about 20% of the world’s nickel supply. The threat of losing it roiled trading markets and sent buyers scrambling for other sources.

Commodity prices have climbed sharply since the February 24 invasion, especially for materials produced in Russia and Ukraine. That includes wheat, oil and natural gas, as well as other key metals such as aluminum, palladium and copper.

But prices were rising long before the start of the conflict, contributing to inflationary pressures not seen since the early 1980s. So, the crucial question for investors is: Are these price spikes sustainable?

“In the short term, the answer is no,” says Lisa Thompson, a portfolio manager with New World Fund®, “The market has overreacted, and we’re already seeing prices come back down a bit. But, compared to where we were a year ago, commodity prices are significantly higher — and I do think that’s a durable trend.”

“Over the long term,” Thompson adds, “prices are likely to remain elevated due to a number of factors, including rising demand, supply shortages and deglobalization forces symbolized by the war in Ukraine and strained U.S.-China relations. Higher prices should be expected in a world where free and open trade is in retreat.”

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Source: Capital Ideas