It is difficult nowadays to avoid hearing major news outlets address the issue of inflation. Even in Israel, where the inflation rate is almost half that of the US and Europe, you see the media discussing the matter quite frequently. Clearly, the public is unhappy with the current situation and demands its governments to step in to stop or at least offset the rising prices. And this is exactly what the central banks around the world have been doing in the last couple of months. For instance, the Fed’s chair, Jerome Powell, has made it clear that their priority is to bring inflation within the 2% target, and they will do everything in their power to make this happen. Furthermore, he acknowledged that the measures they are preparing to take will hurt the economy and households. Hence, the stock market has been experiencing declines since the eight minutes speech that was made last Friday by Jerome Powell. But it is important to keep in mind that the central banks can not guarantee that inflation will stop after interest rates have been increased. The core issue this year is the energy and food prices that skyrocketed because of the war in Ukraine. Therefore, addressing the problems of supply related to these types of commodities will certainly have a greater impact on the rising prices and, as a result, inflation.
Interestingly, when the war started in Ukraine, the media was meticulously covering the possible outcomes of the rising oil and gas prices. However, as oil prices registered the fourth consecutive month of decline, the focus and intensity of coverage shifted somewhat. Yes, the price is still higher than it was a year ago, but it is 27% lower than it was during the last peak of $121 per barrel (for natural gas, it is almost twice as expensive even after the fall of 26% during the last few days). Now, as representatives from OPEC countries are scheduled to meet next Monday to discuss the possibility of reducing oil output, this may quickly change. Nonetheless, it certainly makes the situation even more urgent for politicians to act and address the issue of supply either through negotiations, postponement of the aggressive push against fossil fuels around the world in favour of alternative types of energy, or a combination of both.
The situation has improved, nonetheless, from the perspective of the consumer as a result of the most recent events. The oil price reversed its upward trend as a result of the global economic slowdown and the US going into recession. This has further been exacerbated by China’s decision to place millions in lockdown due to an increase in Corona cases. Cities from the south, including Shenzhen and Guangzhou, to the north, including the port city of Dalian, and from Chengdu in the west, to the centre, including Shijiazhuang in the province of Hebei, were impacted by the measures. This latest shutdown of plants means that there will be a lower demand for energy.
Clearly, the recent slowdown was partially accelerated by the aggressive Fed’s policy and the host of other countries, including Israel, in tackling the inflation. As a result, this has already manifested itself in a falling demand for oil. But this is not an isolated indicator. If the falling demand for oil could be explained in some way by countries switching to alternative energy, there is another vital indicator that reflects global business activity and it has been moving in the opposite direction. The Baltic Dry Index (BDI) a key measure that indicates a state of economic activity worldwide. BDI reveals the average prices paid for the transport of dry bulk materials across more than 20 routes. And at this stage it is 72% lower from its peak.
The BDI has proved to be a reliable tool in identifying future trends in the stock market. One of those instances was the global economic crisis in 2008 when index fell by over 90% within several months. During the early 2000’s when the US went through a recession, the BDI indicated a market rebound. It started to increase in early 2002 and, within a year, hit an annual high well ahead of important US stock market indices.
The number of container ships bound for the Californian ports of Los Angeles and Long Beach has decreased to the lowest level since the bottleneck began to form two years ago. Previously, this traffic congestion represented the vigour of American consumers during the pandemic. According to information from the Marine Exchange of Southern California & Vessel Traffic Service Los Angeles and Long Beach as of late Monday, eight vessels were in the official queue.
The number of container ships in Los Angeles and Long Beach
Last but not least, the active search by EU to move away from dependence on Russian oil and gas, have also contributed to the recent correction in the energy commodities sector. Due to Israel’s ownership of the largest Mediterranean gas reserve, Ursula von der Leyen, president of the European Commission, visited Israel in June to explore expanding gas supplies to the EU. This undoubtedly bodes well for Israel in terms of entrepreneurship and new sources of income for the nation. However, as Israel is reliant on outside sources, oil is the Achilles’ heel. Therefore, the recent events and ensuing drop in the price of oil are quite timely and will greatly aid the government in combating the inflation problem.