It’s about Ukraine, but Not about Ukraine 🪖

Friday marked one year of the conflict in Ukraine. The conflict strained economies, reshaped international trade, and revamped supply chains.

The conflict triggered higher inflation when the world was already grappling with higher inflation. Prices across commodities - energy, industrial and agricultural saw increases, sometimes running in multiples.

Prices have gone back to pre-war levels

One year on, prices for energy, industrial and agricultural commodities seem to have reversed.

• Oil, which was up 25% within three months of the invasion, has fallen by more than 40% after

• Nickel prices had doubled within a month, but are now back to where they originally were. Prices are down by more than 10% for copper, iron ore, and zinc amongst others

• The war sent prices for several items like wheat, corn, soybean and sunflower oil soaring high. However, prices have gone to pre-war levels

For energy and industrial commodities, most of the normalisation can be attributed to reordered trade relations (India buying cheaper Russian oil), substitutes (Europe reducing dependence on Russian natural gas but firing up coal), and slower economic growth (first in China, and then in the West).

For agricultural commodities, prices eased thanks to continued Russian exports, other countries making up for the deficit, and the implementation of the Black Sea Grain Initiative.

But food inflation is a problem

A lot of the cooling off in prices can be seen in inflation rates going off their peak, across the globe. However, one thing that remained sticky was food inflation, and rightly concerning in the case of India. The latest CPI numbers were a ‘shocker’ for many on the street.

Wheat inflation was 25%, rice was at 10%, and Eggs and milk reported inflation at 9%. If international prices have gone back to pre-war levels, and if it’s not about Russia-Ukraine any longer, what is it that’s driving food inflation in India?

1. Poor domestic wheat crop after last year’s heat wave

2. Poor rice production because of rainfall deficits and irregularities

3. Rising fodder prices

4. A global egg shortage caused by a nasty bird flu

What next?

We reckon there is a case for stability on prices of energy and industrial commodities hereon as the Western economies have shown more resilience and now that China intends to come back with all its might.

On food inflation, there is little that central bank policies can do when the problem isn’t demand-led, but rather supply-driven. Both these factors make a case for prices to remain steady to higher in the coming months.

💡 Our View: Sticky inflation may push the RBI to hike rates once more in April. This pushes the probability of a reversal in monetary policy towards the end of the year. Higher rates and higher yields are expected to stay for at least a couple of months, after which, it would be a good idea to start shifting maturities on debt portfolios. A policy standby if not reversal would offer a window for locking yields.