Sunday, February 26, 2023
Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He also manages the All-Weather portfolios.
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.
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?