A world that's more expensive is starting to destroy demand

Global food prices set a record last month, according to UN, as Russia-Ukraine invasion disrupted shipments from countries that, together, supply 1-quarter of world's grain and much of its cooking oil

Prices for some of the world’s most pivotal products – foods, fuels, plastics, metals – are spiking. That’s forcing consumers to cut back and, if the trend grows, may tip economies already buffeted by pandemic and war back into recession.
 

The phenomenon is happening in ways large and small. Soaring natural gas prices in China force ceramic factories burning the fuel to halve their operations. European steel mills using electric arc furnaces scale back production as power costs soar, making the metal even more expensive.
 

Global food prices set a record last month, according to the United Nations, as Russia’s invasion of Ukraine disrupted shipments from the countries that, together, supply one-quarter of the world’s grain and much of its cooking oil. More-expensive food may be frustrating to the middle class, but it’s devastating to communities trying to claw their way out of poverty. For some, “demand destruction” will be a bloodless way to say “hunger.”
 

In the developed world, the squeeze between higher energy and food costs could force households to cut discretionary spending. China’s decision to put its top steel-making hub under Covid-19 lockdown could limit supply and push up prices for big-ticket items like home appliances and cars. Electric vehicles from Tesla, Volkswagen and General Motors may be the future of transportation, except the lithium in their batteries is almost 500 per cent more expensive than a year ago.

 

“Altogether, it signals what could turn into a recession,” said Kenneth Medlock III, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
 

The International Monetary Fund is poised to cut its global growth forecast because of the war, and it sees recession risks in an increasing number of countries, Managing Director Kristalina Georgieva said. The world economy is still set to expand this year, though by less than the 4.4 per cent previously anticipated, Georgieva said in an interview with Foreign Policy magazine.
 

Federal Reserve Chair Jerome Powell said Russia’s invasion of Ukraine is aggravating inflation pressures by boosting prices on food, energy and other commodities “at a time of already too high inflation.” Curbing high inflation is a top priority, and the central bank is prepared to raise interest rates by a half percentage-point at its next meeting if needed, he said.
 

The danger is more acute in Europe, where energy bills are soaring due to a reliance on Russian supplies. Natural gas prices on the continent are six times higher than a year ago, and electricity costs almost five times more.

The UK downgraded its economic forecast to 3.8 per cent from 6 per. The dynamic is playing out in products as ubiquitous as oil and as specialised as lithium, a key ingredient in advanced batteries for consumer electronics and plug-in cars. Battery makers in China paying five times more for the metal than a year ago have to pass some of that cost on to car companies, potentially slowing EV sales.
 

Fertiliser makers, who use natural gas as a raw material, started scaling back operations last year. Italy, Germany and the UK are exploring whether to burn more coal next winter to ease the need for gas in power generation. This would free up more of the fuel for industries, such as glass makers and large steel mills, that can’t easily replace it.
 

Much like gasoline, demand for groceries in the developed world tends not to change much with price. Shoppers may change what they buy –ditching pricier items for cheaper substitutes – but they still have to buy. Yet restaurants find rising prices an obstacle as they try to rekindle business post-Covid.