The global economy is facing increasing stagflationary forces as rising energy prices are pushing up inflation and slowing recovery from the pandemic recession.
Oil rose to more than $80 a barrel for the first time in three years, natural gas with delivery in October traded at its highest cost in seven years and the Bloomberg Commodity Price Index rose to its highest level in a decade.
Food prices are also rising, partly due to a poor harvest in Brazil, with the UN benchmark index up 33% over the past 12 months.
Rising costs for households and companies are undermining confidence, while pushing up inflation faster than economists expected just a few months ago. This could put policy makers in the uncomfortable position of having to choose whether higher prices or weaker growth represents a greater risk.
This shock has already been drawn by comparisons with the combination of economic stagnation and oil-induced spikes in inflation that dominated the 1970s. While many central bankers dismiss this as an exaggeration, there is concern that longer price rises will lead to greater demand for higher wages, taking the economy into a vicious cycle.
"We are seeing all this inflation," Supriya Menon, strategist at Pictet & Cie, told Bloomberg TV. "Ultimately, how do we resolve this? Part of the solution is demand destruction."
Experts at Exness Forex Broker calculate that a 20 percent increase in commodity prices implies a transfer of at least $550 billion, roughly equivalent to Belgium's annual production, from commodity consumers to those who produce the most. In dollar terms, China, India and Europe are the biggest losers. The winners are Russia, Saudi Arabia and Australia.
Sharp output cuts in several energy-intensive industries in China are now expected to slow growth this year, with economists from Goldman Sachs Group Inc. to Morgan Stanley lowering forecasts.
In Britain, consumer confidence fell at its sharpest pace in September as coronavirus insulation rules were tightened almost a year ago as Britons braced for looming income cuts.
In addition to petrol stations shutting down due to a shortage of drivers to deliver fuel, the UK, like much of Europe, is suffering from a jump in electricity and natural gas prices caused by a spike in demand after the lockout and a reduction in stocks left over from last season. . This has undermined already fragile consumer sentiment.
"There is a limit to how many price shocks we can continue to call" one-offs," George Buckley of Nomura wrote in a report. "Higher energy prices often lead to lower confidence, especially at a time when a rise in contagion could still halt the nascent economic recovery."
The latest surge in commodity prices took markets by surprise as major central banks began signalling their intention to limit stimulus.
"Does this renewed surge in energy prices mean central banks will accelerate this?" said Jim Reed, global head of credit strategy at Deutsche Bank AG. "Or will it hit demand enough to actually slow it down? This is an incredibly delicate and difficult period for central banks."
Bank of England Governor Andrew Bailey drew attention to the conundrum when he looked at the limits of monetary policy to deal with some of the factors causing consumer prices to rise.
"The shocks we are seeing are limiting supply in the economy compared to the recovery in demand," he said in a statement on Monday. "This is important because monetary policy will not increase the supply of semiconductor chips, it will not increase the amount of windfall (no, really)."
Consumer confidence has also suffered in the US, where high prices have reduced the terms of purchase of durable goods to their lowest level since the 1980s.
For advanced economies, the good news is that they have generally recovered from the recession better than expected a year ago.
Gross domestic product could return to its pre-crisis trajectory in 2022, according to forecasts by the Organisation for Economic Co-operation and Development this month, a stronger result than predicted in late 2020.
European Central Bank President Christine Lagarde said on Tuesday that a key problem for policymakers is that "we are not overreacting to temporary supply shocks that have nothing to do with the medium term".