How are Inflation, Market, and Commodity prices related to each other?

The complex world of economics has never been easy for anyone. The relationship between inflation, market forces, and commodities has proven to vary as per the global economy. The delicate balance between the prices is intertwined which gives a new vision of the economy.

Inflation, market, and commodity prices are interrelated names that hold a connection in economic dynamics. The relationship between these elements is highly essential for the policymakers, investors, and general public to understand the patterns.

In this article, we are diving into how a change can trigger a domino effect and the complexity of inflation, market, and commodity prices to illuminate our business minds to the dynamics of the economic landscape.

How Commodity price affects the markets and inflation

Commodity prices are subjected to change to compute the overall inflation data. It represents a significant volatility in the CPI numbers that includes expenses like groceries, gas/fuel, and more that are essential to consumers. Moreover, commodities represent a 38% count of the Consumer Price Index. More precisely, energy represents about 7% and food represents 13% of the index. Commodities are built up of a wide range of raw materials like Energy products, Metals, and Agricultural products.

Inflation: An Invisible Phenomenon

Inflation is a term that is used to describe the steady rise in the general price level for some time. It is often referred to as a silent thief that degrades the power of money. This often leads to a loss in the public sector. In general, it is a term used when the prices of goods and services increase over time. It also has the potential to erode the purchasing power of consumers. Careful monitoring of inflation done by the Central Banks aims to moderate and predict rates for economic stability. The main reason behind inflation is the increase in demand, rising production costs, and policies offered by the finance companies.

Inflation is further classified into three types:

● Demand-Pull Inflation: This is caused by an increment in the total consumer demand.

● Cost-Push Inflation: It occurs when the production costs increase.

● Built-in Inflation: It occurs when workers demand higher wages to manage the rising living cost.

Understanding the concept of inflation and commodity price forecasting can help an individual in making better financial decisions.

Inflation can be measured with the help of two primary indexes like Consumer Price Index and the Personal Consumption Expenditures Price Index.

Market Dynamics: The Pulse Of Economics

The market is the platform or the gateway to sell and earn profit. It is the heartbeat of economic activity that allows buyers and sellers to engage themselves in the transaction procedure. It also allows them to set prices, review the transactions forward them, and determine the value of the items.

Markets where the major communication between a buyer and seller occurs are also further divided into three parts- Stock markets, Foreign exchange markets, and Bond markets. For example, stock markets are the global investing platforms with trillions of dollars accumulated over the period of time along with the combined market, it reaches up to  $109 trillion. Although the value set is influenced by many events in between. Also, the major issue that has been noted is inflation's impact on the market.

As the prices go up, consumers reduce their purchasing power which leads to a shift in demand. Moreover, inflation is the only factor that influences the interest rates that affect the economy to a greater level.

Commodity Price: The Backbone Of Global Trade

If we conclude commodities into a simple word: It is an item that is used for selling and buying to earn profit. It can range from oil to gold to any products you see in today’s world. It serves as a heartbeat of the global economy and has increased it. The prices of commodities are influenced by various factors that act as a law of supply and demand in the world. Gold is viewed as an inflation pointer, the prices of gold varies every year. For instance, In May 2023, it was recorded at $2057/ounce and then dropped to a value of $1831/ounce in October.

The relationship between inflation and commodity is directly proportional. Whenever inflation takes hold, it adversely affects commodity prices and the commodity market. The increased production costs increase the price of goods and services along with the raw materials being used in making them.

The change in inflation affects the customer behavior as well. For example, When the inflation count is high, investors may flock to valuable commodities like gold.

The Interconnected Web:

A. Inflation And Commodity Prices

1.     Supply and Demand: The economical terms being interrelated produce a different meaning to the production. Central Banks often put interest rates to control inflation. Whenever the inflation count is high, the interest rates automatically skyrocket. This leads to higher interest rates that affect the market dynamics. Weather is the game changer for agricultural commodities. For the year 2023, the measured CPI was just 2.7% more as compared to the 2022 data.

2.     Cost-Push Inflation: It is one of the types of inflation that is a significant part of commodity prices. When the cost of raw materials along with labor rises, it also increases the inflation prices. It is a direct relationship between both terms.

B. Inflation And Market Forces

1.     Interest Rates and Monetary Policy: Monitoring inflation expectations can lead to a rise in volatility as an investor. Market participants adjust their strategies to produce a good impact on the global world. Low inflation expectations encourage risk-taking behavior within the market.

2.     Investor Expectations: Central banks use interest rates to control inflation. Market investors use different strategies to adjust their finances to control the eroding of the economy. The lower the inflation rate, the higher will be the risk taking tendency.

Analyzing the Impact of Inflation on Specific Commodities: A Technical and Statistical Perspective

Let's start with establishing the  correlation analysis using inflation data for crude oil.

To perform a comprehensive analysis of the correlation between inflation rates and commodity prices, particularly crude oil, for the period 2013-2023, we gathered historical data on U.S. inflation rates and crude oil prices.

For the U.S. inflation rates, the data from 2013 onwards shows significant fluctuations, indicative of various economic conditions, including the impacts of the COVID-19 pandemic and subsequent recovery phases. Inflation rates saw a notable increase in recent years, with a peak in 2022 before starting to moderate towards the end of 2023, as evidenced by the inflation rate decreasing from a high of 9.06% in June 2022 to 3.35% by December 2023​​.

Crude oil prices also experienced volatility during this period. The data reveals how oil prices have been impacted by global events, economic policies, and shifts in supply and demand. For instance, the nominal price for a barrel of Illinois Crude Oil peaked in June 2022 at $107.12, reflecting the broader trends in energy markets and economic activity. The fluctuations in oil prices over the years are indicative of the complex interplay between geopolitical tensions, changes in production levels, and global demand​​.

The correlation analysis between these two datasets would involve calculating the correlation coefficient to understand the strength and direction of the relationship between inflation rates and crude oil prices. A positive correlation coefficient would indicate that as crude oil prices increase, inflation rates tend to rise, suggesting that higher energy costs contribute to overall inflation. Conversely, a negative correlation would suggest that the two move in opposite directions.

For more detailed insights and data exploration, you may refer to the sources from the U.S. Energy Information Administration​​ and historical inflation and oil price data provided by Inflationdata​​. These resources offer comprehensive datasets and analyses that can further enhance understanding of the economic trends over the past decade.

Now let's discuss the trends and correlation analysis using inflation data for gold prices.

Key Points in Gold Price Trends 2013-2023:

1. 2013-2016: This period saw a decline in gold prices from the highs of 2011-2012, primarily due to the recovery of the global economy after the financial crisis and a strong US dollar. Lower demand for safe-haven assets contributed to the price decline.
2. 2017-2019: Gold prices began to recover and showed moderate increases through these years. Factors contributing to this uptrend included geopolitical tensions, trade wars, and periods of US dollar weakness, which increased investment demand for gold.
3. 2020: The outbreak of the COVID-19 pandemic led to a significant spike in gold prices, reaching record highs. The uncertainty caused by the pandemic, along with global economic slowdowns, massive stimulus packages, and lower interest rates, drove investors towards gold as a safe-haven asset and a hedge against inflation.
4. 2021-2022: As economies started to recover from the pandemic and vaccination campaigns were rolled out globally, gold prices saw some volatility but remained at elevated levels compared to pre-pandemic years. Inflation concerns and continued monetary easing in many countries supported gold prices.
5. 2023: In anticipation of and reaction to tightening monetary policies (as central banks around the world started increasing interest rates to combat inflation) and a strengthening US dollar, gold prices faced downward pressure but continued to play a crucial role in investors' portfolios as a diversification tool and inflation hedge.

Source: https://goldprice.org/gold-price-history.html

Analysis and Insights:

Throughout the decade, gold prices have demonstrated their sensitivity to global economic indicators, monetary policy changes, and geopolitical events. The period of 2013-2023 underscores gold's role as both an investment asset and a hedge against economic uncertainty.

● Monetary Policy Influence: The Federal Reserve and other central banks' policies, particularly regarding interest rates and quantitative easing, have had a significant impact on gold prices. Lower interest rates tend to be bullish for gold, while higher rates can exert downward pressure on prices.

● Economic Uncertainty and Inflation: Gold is traditionally seen as an inflation hedge. Periods of high inflation or economic uncertainty have historically led to increases in gold prices, as seen during the COVID-19 pandemic.

● USD Relationship: Gold prices often move inversely to the US dollar. A weaker dollar makes gold cheaper for holders of other currencies, increasing demand, while a stronger dollar can decrease gold's appeal.

● Investment Demand: Investment demand, including ETFs and bars and coins, significantly influences gold prices. Economic uncertainties and market volatility tend to increase investment demand for gold.

Correlation Analysis: Relationship between Inflation and Key Commodities

Commodities can be broadly categorized into several groups, such as energy (e.g., crude oil, natural gas), metals (e.g., gold, silver, copper), and agricultural products (e.g., wheat, corn, soybeans). The impact of inflation on these commodities can vary based on factors such as supply and demand dynamics, production costs, geopolitical events, and monetary policies.

Below is a table that outlines how different categories of commodities might be affected by inflation, based on general economic principles:

Source: https://blogs.worldbank.org/

Reasons:

● Energy: Energy commodities are crucial for almost all economic activities. Rising energy costs due to inflation can have a widespread impact on the production costs of goods and services.

● Precious Metals: Historically, gold and other precious metals have been considered safe havens during times of high inflation. Investors often turn to these assets to preserve value.

● Industrial Metals: The demand for industrial metals can increase with inflation as economies expand and require more raw materials for construction and manufacturing.

● Agricultural Products: Food prices can be affected by inflation, but they are also highly sensitive to weather conditions, changes in global supply chains, and changing dietary habits.

● Livestock: Similar to agricultural products, livestock prices are influenced by a range of factors, including feed prices, which can increase with inflation.

It's important to note that the impact of inflation on commodity prices can be complex and influenced by numerous interrelated factors. Historical data analysis and economic models can provide more precise insights into how specific commodities have reacted to inflation over time. For detailed statistical analyses, academic journals, financial market reports, and databases like those provided by the World Bank, the International Monetary Fund, or specialized commodity exchanges (e.g., Chicago Mercantile Exchange, London Metal Exchange) would be valuable resources.

Role of Pricevision’s AI Tool in Predicting Commodity Futures Prices

The markets are volatile so the risks associated with investments are also high. Prediction of prices can get your money safe if you choose the right tool before investing. Commodity prices are predicted as per the current market trends to give you an approximate idea. PriceVision shares the live commodity prices to keep you ahead of the competition. If we check previous year's data, it indicates that commodities like energy resources, precious metals, and agricultural products exhibit strong positive correlations with inflation which can touch the heights and the rock bottom also. PriceVision is an effective way to understand the pattern of commodities market to make the investors take good decisions.

PriceVision is an artificial intelligence cutting edge tool that allows data to generate accurate forecasts that helps you to make confident decisions in the future. The commodity price forecasting is accurate and has helped many users so far. If you are someone who wants to make the right decision without any loss, try the Pricevision AI tool today.

Conclusion

The article revolves around the economics of the world. The interrelation between inflation, market forces and the complex landscape produces a different outcome to what you are seeing today. The proportionality relationship appears to be the main reason behind the pricing of commodities and global wealth. Understanding the relationship between these terms is crucial for making better decisions. Live commodity prices can also give you the correct idea of the current growth rate within the market. PriceVision is a wonderful tool that can help you in getting on the right track in the financial world. Understand these terms to build a resilient economy in this changing world.