The Russian invasion of Ukraine triggered the effects of the “money printing”.
Yet, while the situation looks increasingly unfortunate, a further leap in inflation is not “set in stone” and could very soon fall sharply. In this case, it should be remembered that it is lower inflation, which means that the price is growing more slowly, and not that the general price level in the country is decreasing. The reasons why things are so bad right now have been discussed often, but often superficially. The main culprit is considered to be the war initiated by Russia in Ukraine, which undeniably has a very destructive effect on the solvency of the population, but the current denials arose about a year or a half before the Russian invasion. The undoubtedly necessary economic support measures of governments and central banks during the Covid-19 crisis have had the other side of the coin relating to the activities of speculators in global trade in goods. As soon as new support measures are announced, which often also means starting the money press, a clear signal to “buy” is given to those who trade on the stock exchange. In this case, almost everything was bought, from industrial metals, oil and gas to various agricultural crops. Often it doesn’t even matter what the market saturation is for that particular commodity, the important thing is to put money to work and earn as fast as possible.
The price of gas has nowhere to rise further
Already a year ago it was clear that inflation would continue to gain momentum, but the rhetoric of the central bank regulating this process, particularly the European Central Bank, was quite simple and oriented towards the view that rising prices would exhaust himself. But appetite comes with eating and price bubbles have continued to burst, but the Russian invasion of Ukraine has created stress on the stock exchanges, which has turned into a panic in the purchase of commodities, when the economic justification of prices is already becoming rather questionable. For example, the price of natural gas, which previously was € 20-30 per megawatt hour, was able to temporarily exceed € 300 per MWh this year. Of course, such a price run cannot continue for long, no matter how large the market deficit is, and in the end it all came to its logical conclusion. At its highest peak at the end of August, the price of gas was about three times higher than it is today, when the price is approaching the € 100 per megawatt hour mark. We experienced such a price as early as December last year, when the sound of gunfire in South Eastern Europe was spontaneous and much quieter. It is also very likely that in the coming months the price of gas on the stock exchange could drop to a level closer to the usual 20-30 euros per MWh, rather than the price measured in hundreds of euros.
This will not have a significant immediate impact on the inflation indicator, but it will set the stage for the next heating season to be spent with fewer excesses. The correlation is not direct, but cheaper gas is also likely to contribute to lower chip and pellet prices. It will certainly affect the price of electricity as well, because expensive gas was the reason for the jump in the price of electricity. True, we have no reason to hope that the drop in the price of “blue fuel” is unambiguous, as Russia will most likely try to manipulate supplies once again, causing prices to fluctuate rapidly.
However, at the moment there are at least two aspects that suggest that the gas price vector is pointing downwards. The first: under the influence of the war, Russia’s financial capacity is running out every day and it can no longer afford to work with gas pipelines with the same strength as the start of the war. The second important aspect is the slowdown in the world economy, which brings down the price both because consumption is decreasing and because investments in gas are no longer interesting for stock market speculators. At one time, the purchase of gas contracts could have been considered a relatively safe source of profit, but now it is becoming a very risky financial activity that can quickly collapse. It should also be taken into account that due to the prevailing stress, gas purchases proceeded very much in a panic, which also contributed to price jumps that would have remained if the filling of gas storages had taken place calmly and without excessive stress. The latter approach is expected to be put into practice when deposits begin to run out towards the end of winter. The restocking will likely contribute to the price increase once again, but probably much more contained than what we have seen this year.
The market begins to tune in to a recession
The fact that, when the stress subsides, prices fall is also indicated by the oil market, which did not suffer the expected shock from the impact of the war. Recently, gasoline and diesel prices have risen again, but this process is likely to be temporary. The tandem of Russia, Saudi Arabia and OPEC + as a whole is trying to raise prices by signaling a reduction in production volumes, but the real reduction could be much less than expected or even completely absent, as many producing countries have not already been able to cope with the assigned quotas. On Monday afternoon, the price of Brent North Sea crude oil was below $ 90 a barrel, down from $ 98 at the beginning of the month and $ 139 at the most stressful time since the war began. The global economic crisis can affect the oil market even more than gas, and in fact it cannot be excluded that very soon the situation will prove to be very similar to that of 2014-2015. in the year when, as the fight for market share increases, its participants will start dumping, causing the price to fall faster and faster. Moreover, at that time it was taking place in a much more favorable market context and oriented towards economic growth.
The change in sentiment in the stock market also affected food prices. The World Food and Agriculture Organization (FAO) reports that its food price index has fallen for the sixth consecutive month. This does not yet mean an immediate drop in food prices on our store shelves, but it sets the stage for it in the coming months. Among other things, you can observe how discounts on food products in Latvian stores are becoming more powerful and the price levels offered to the buyer within them are becoming lower and lower. This, among other things, also reduces the inflation indicators still in progress. The inflation indicator is likely to reach its highest point in November or December, after which the growth of the consumer price index will begin to slow down. This does not mean an immediate improvement in purchasing power indicators. Also, if inflation is rising rapidly, the reason for this will not be encouraging. This will be associated with a cooling of the global economy, which could lead to new financial turmoil. Therefore, the benefits of lower inflation can be “eaten up” by a decrease in income or, even worse, a loss of income.
