Commodities and larger financial markets witnessed volatile trade in the last few days amid continuing debate if the rising inflationary pressures may force central banks to tighten monetary policy.
COMEX gold has held steady near $1,900 a troy ounce as it counters its increased appeal as an inflation hedge against the prospect of monetary tightening by major central banks. Brent crude has jumped to May 2019 highs, adding to inflation concerns. Copper is struggling for direction amid inflation worries and China’s efforts to cool rising raw material prices.
The inflation debate intensified this week as market players assessed the US and China inflation data and European Central Bank's monetary policy meeting. In the US, consumer prices rose 5 percent in May compared to the year-ago period, the fastest pace since hitting 5.4 percent in August 2008.
China's inflation data was mixed as producer prices rose more than expected, while the increase in consumer prices was slower than the forecast.
Producer price rose 9 percent in May compared to a year ago, the fastest since September 2008. China has repeatedly expressed concerns about rising raw material prices and taken measures to check them.
As expected, ECB kept monetary policy unchanged and maintained a dovish stance but raised its growth and inflation forecasts. ECB expects the annual inflation at 1.9 percent in 2021.
Adding to inflation concerns, the UN Food and Agriculture Organization (FAO) said the world's food import bill, including shipping costs, is projected to reach $1.715 trillion this year, up 12 percent from $1.530 trillion in 2020.
FAO projects that these high costs may persist for a sustained period as nearly all agricultural commodities have become more expensive, while a rally in energy markets could raise farmers' production costs.
While we have seen increased volatility in financial markets, equity markets are still at elevated levels even as bond yields have eased, which show that market players are not expecting central banks to alter their monetary policy.
The rise in inflation pressure is seen as transitory and also due to pick up in economic growth.
The Federal Reserve's monetary policy meeting on June 15-16 may offer some clue to the inflation question. The Fed has, so far, maintained that the interest rate may remain low for a long time. Some Fed officials, however, are willing to discuss tapering of bond purchases in the coming months if economic activity remains strong.
Ahead of the meeting, the US dollar index remains directionless. While 10-year bond yield has slumped to March lows, some US equity indices are near record highs.
The Fed is likely to maintain a dovish stance but may be forced to acknowledge rising price pressure, which means that the monetary tightening debate is likely to continue and volatility is here to stay.
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