Inflationary forces are mounting rapidly across financial markets, adding to challenges for investors as Russia’s military action in Ukraine compounds the impact of the coronavirus pandemic.
Brent crude oil futures surged above $100 a barrel on Thursday to levels last seen in a 2014, a move that will ripple through energy markets, factories and on to consumers. The cost of producing food will also jump, putting particular pressure on emerging markets.
As inflation and fears of it rise, analysts warn that market volatility will climb, fueling a negative feedback loop. Commodities from gold (the highest in more than a year) to aluminum (trading near an all-time record) to corn (the most expensive in nine months) all point to difficult decisions for investors.
Central bankers were already warning of the heightened challenge, even before Russia attacked targets across Ukraine. The Bank of Korea raised its price forecast sharply on Thursday while noting the crisis in Eastern Europe could have a significant impact on inflation.
Commodities are attracting their highest premium on record for deliveries one year ahead, a measure known as backwardation that reflects how physical supplies remain tight amid booming demand.
As well as creating uncertainty and a flight to haven assets, the conflict in Ukraine could disrupt the delivery of staples like grains to world markets and energy supplies like gas to Western Europe.
Money market indicators for inflation expectations are rearing up again. Two-year breakeven rates on U.S. Treasury inflation-protected securities — or the difference between those yields and the ones on typical Treasuries — have climbed to the highest since Bloomberg started compiling the data in 2004.
Meanwhile, the gap between U.S. two-year and 10-year Treasuries has narrowed to the least since early 2020, reflecting expectations for higher interest rates to address inflation and concerns for the economic outlook.
