Flare-up in Middle-East conflict could stoke global inflation - WB

The levelling off of global commodity prices could hurt prospects for lower inflation, World Bank now says.

Prices are levelling off after a steep descent that played a decisive role in whittling down overall inflation last year, into this year, which could make it harder for central banks to cut interest rates quickly, according to the World Bank’s latest Commodity Markets Outlook.

This adds to the conflict in the Middle East which could halt inflationary decline as international trade remains disrupted, with freight costs on the shipping industry rising.

This means Kenya, which heavily relies on imports, remain exposed as its import bill continues to rise.

Kenya National Bureau of Statistics (KNBS) data shows that Kenya's import bill grew by four per cent to Sh2. 59 trillion last year, with non-food industrial supplies, fuel and lubricants from Middle East and other Asian countries, accounted for about 60 per cent of the import bill.

China, UAE, India and Saudi Arabia accounted for half of Kenya's imports last year.

World Bank's forecast means Kenya could see inflation start rising after back to back declines this year.

Kenya’s inflation fell to a two-year low in April, at five per cent, official data shows, driven mainly by improved supply of key food items, particularly cereals and edible oils, and falling prices of other food commodities and utilities such as electricity and fuel.

According to the Central Bank of Kenya, a key risk to inflation is international oil prices, which have trended upwards since January 2024 largely driven by disruptions to shipping through the Red Sea, and production cuts by OPEC+ and other allied oil producers.

The five per cent Kenya inflation was a decline from 5.7 per cent in March and 6.3 per cent in February.

CBK in February this year increased its base lending rate from 12.5 per cent to 13 per cent, which was retained in April, to manage inflationary pressures.

“The Monetary Policy Committee concluded that the current monetary policy stance will ensure that overall inflation continues to decline towards the five per cent mid-point of the target range, and thus decided to retain the Central Bank Rate at 13 per cent,” governor Kamau Thugge said during the recent MPC meeting.

Between mid-2022 and mid-2023, global commodity prices plummeted by nearly 40 per cent, the World Bank report indicates.

This helped to drive most of the roughly two-percentage-point reduction in global inflation between 2022 and 2023.

Since mid-2023, however, the World Bank’s index of commodity prices has remained essentially unchanged.

Assuming no further flare-up in geopolitical tensions, the bank’s forecasts call for a decline of three per cent in global commodity prices in 2024 and four per cent in 2025.

That pace will do little to subdue inflation, the global lender says, that remains above central bank targets in most countries.

It will keep commodity prices about 38 per cent  higher than they were on average in the five years before the Covid-19 pandemic.

“Global inflation remains undefeated,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President. “A key force for disinflation-falling commodity prices-has essentially hit a wall. That means interest rates could remain higher than currently expected this year and next.”

Persistently high geopolitical tensions over the past two years have propped up the price of oil and many other critical commodities even as global growth has slowed. 

The price of Brent crude oil, for example, surged to $91 per barrel last month —nearly $34 per barrel above the 2015-2019 average.

The Bank’s forecasts indicate that Brent prices will average $84 per barrel in 2024 before declining to an average of $79 in 2025, assuming no conflict-related supply disruptions. 

If the conflict in the Middle East were to escalate further, however, oil-supply disruptions could push up global inflation. 

A moderate conflict-related supply disruption could raise the average Brent price this year to $92 per barrel, but a more severe disruption could see oil prices surpass $100 per barrel, raising global inflation in 2024 by nearly one percentage point.

“A striking divergence is emerging between global growth and commodity prices: despite relatively weaker global growth, commodity prices will most likely remain higher in 2024-25 than in the half-decade before the Covid-19 pandemic,” said Ayhan Kose, World Bank Group’s Deputy Chief Economist and Director of the Prospects Group.

Central banks must remain alert about the inflationary implications of commodity-price spikes amid elevated geopolitical tensions,  he noted.

The average price of gold—a popular choice for investors seeking “safe haven”—is expected to hit a record in 2024 before moderating slightly in 2025.                      

An escalation of the conflict in the Middle East could also drive up prices of natural gas, fertilisers and food.