Inflation and Commodities in 2022

European Average inflation rate

In March 2022, the European Union’s inflation rate reached 7.8%, the highest inflation rate in the given period. Before 2021, the EU’s inflation rate peaked at 4.4 percent in July 2008 and at 0.5 percent in January 2015, when prices were dropping.

(EU HICP January 1997 – March 2022)

Recovering from the pandemic and high energy costs

Many of the reasons that have caused prices to increase so quickly in recent months are due to the reopening of the European economy in 2021 following the unanticipated shock of COVID-19 in 2020. Global supply chains have yet to recover from the pandemic’s manufacturing concerns, travel limitations, and labor issues. Rising energy prices have further worsened supply issues, notably in the transportation industry, which had the highest inflation rate of any EU sector in December 2021.

The US is struggling with inflation as well

Europe is not the only region that has experienced high inflation rates. For example, in the United States, the consumer price index hit a 40-year high of 7% in December 2021, affected by many of the same reasons that drive inflation in the EU.

Scandinavian Average inflation rate

Scandinavia can refer to three countries in English usage – Sweden, Norway, and Denmark. Scandinavia is sometimes considered only Sweden, Norway, and part of Finland, but technically it is then called the Scandinavian Peninsula. For this article, we include three countries as mentioned before – Sweden, Norway, and Denmark.

The Scandinavian average inflation rate is 5.3%

The Scandinavian inflation rate is much better than average in Europe. The worst inflation-affected country in Scandinavia is Sweden, with 6% inflation recorded in March 2022 according to Tradingeconomocis.

Inflation in Sweden

Inflation in Sweden has increased more than 62% since January 2022. Swedish March inflation rate is at an over 30-year high, which is the highest since December 1991 and well above market expectations of 5.6%.

(Tradingeconomics statistics)

The annual inflation rate in Sweden increased to 6.0% in March of 2022, the highest since December of 1991, and above market forecasts of 5.6%.

The upward pressure mainly came from:

• Housing and utilities +7.9% – mostly on account of higher prices in electricity and fuel.
• Non-alcoholic beverages +5.8%
• Transport +10.9%
• Recreation and Culture +2.9%
• Restaurants and Hotels +5.9%
• Miscellaneous goods and services +3%

On a monthly basis, consumer prices jumped 1.8%, accelerating from a 0.9% rise in the previous month.

Inflation in Norway

The inflation rate increased in Norway compared to previous months and because of the same reasons as in Sweden.

Norway’s annual inflation rate rose to 4.5 percent in March 2022, up from 3.7 percent in February, but fell short of market expectations of 5%. It was the most significant rate of inflation since December, as both transportation and food prices increased (7.9 percent vs. 4.6 percent in February)

Inflation in Danmark

In March, the harmonized consumer prices index increased by 6%, the most considerable increase since the series began in 1990.

The annual inflation rate in Denmark jumped to 5.4 percent in March 2022, up from 4.8 percent the previous month. It was the greatest inflation rate since May 1985, mainly to increases in both electricity (44.6%) and gas costs (82.6 percent ). Transportation (10.2 percent versus 7.8% in February), housing, and utilities all climbed at a quicker rate (7.0 percent vs. 6.7 percent)

Where is the inflation pressure coming from?

Overall inflation in the EU is caused by much higher energy prices directly related to the Russian war against Ukraine in Europe.

In 2018, around 40% of EU natural gas imports came from Russia, according to e.ir.info.

(Europa.eu – Eurostat Inflation in March 2022 document)

Merely three external producers supply most of the EU’s natural gas: Russia, Norway, and Algeria. Russia is the continent’s largest gas supplier, accounting for 37.7% of the EU 27’s total gas imports in 2005. (1) 30 In general, the further east one travels in Europe, the more reliant on Russian gas imports one becomes, to the point that seven former Warsaw Pact and Soviet Union European counties rely on Russia for over 99 percent of its natural gas. Almost all Central and Eastern European nations rely on Russian natural gas for the majority of their needs (2)
(2) Miklos Losoncz, “Analysis: Energy Dependence and Supply in Central and Eastern Europe, “accessed September 1, 2008, EurActiv.com

Naturally, the most inflation-affected countries are the countries that are the most reliant on Russian gas. Here is a table of Countries and the % of Domestic Consumption.

(Marshall Centre study in 2008)

Lithuania and Estonia are the most inflation-affected countries in the EU in 2022. 

According to the IEA, the EU imported 155 billion cubic meters of natural gas from Russia in 2021, almost half (45%) of its gas imports and nearly 40% of the total amount used. Switching from burning natural gas to burning coal is a quick fix that is technically possible, but it’s not going to help the EU achieve its climate goals, wrote CNBC.

Commodities and Inflation

When the fear of inflation becomes worse, investing in commodities usually becomes more appealing. Commodities, according to research, are one of the asset types most positively associated with inflation hedge (protector) as measured by the Consumer Price Index.

Precious metals are considered to be a solid portfolio diversifier and inflation hedge. The most known precious metal against inflation is Gold, but silver, platinum, and palladium are solid protectors, but each comes with its own risk.

Do commodities protect against inflation?

(Funds-Europe graph from Bloomberg)

Inflation, like any other risk, can wreak havoc on a portfolio. Stocks, savings accounts, and bond holdings can all be impacted by the dollar’s depreciation. Gold, silver, and other precious metals can be a secure method to avoid these dangers and protect a prudent investor against hyperinflation and inflationary pressures. Gold can always be a part of an investor’s portfolio when diversity is the objective.

Why do commodities protect against inflation?

Unlike paper money and equities, precious physical metals like Gold and silver are resistant to inflation because their value is derived differently from paper currency.

The dollar’s value is determined by the Federal Reserve, central banks, global issues, and the economy’s overall health. Each dollar’s worth steadily falls over time unless there is a subsequent surge in demand that permits individuals to demand more dollars in a more prosperous economy. When central banks feel the economy requires more money to boost lending and growth, they issue additional currency – we have seen this, especially in the last two years, when central banks have printed more money than ever. More paper currency circulated means a significant rise in the supply of dollars in the economy.

On the other hand, Gold has value due to its rarity and several modern applications. Gold may be used to create jewelry, commemorative coins, bars, and other items. Gold is also important because it is highly conductive, making it useful in various industrial and technological applications. Another key reason for Gold’s richness and continuous success is its symbolic importance.

There is no reason to expect that Gold’s value will decline anytime soon, given that it has been used as money and a symbol of riches for thousands of years.

Investors gravitate to secure, reliable investments like actual Gold and silver to keep their money during times of economic uncertainty or recession when the value of the dollar plummets. As a result of this demand, precious metal prices rise, giving investors a hedge against inflation and the dollar’s depreciation.

Historically the best protectors

Gold win’s

When we travel back in history to the last major global economic crisis in 2008, we can potentially draw some parallels and see similarities to what is happening now.

(Source: Cleveland Federal Reserve, St Louis Federal Reserve, World Gold Council, data as of end of October)

Gold prices dropped by roughly 20% at the time, from just under $1,000 per troy ounce to around $750 per troy ounce. The precious metal subsequently went on to soar for the following three years, eventually reaching a peak of about $1,900 per troy ounce in 2011.

This time around, we’ve witnessed a similar downturn, with Gold falling around 18 percent between August 2020 and the cycle’s trough in April 2021, when Gold briefly traded below $1,700 per troy ounce.

Here we would like to refer to an article we wrote a while back where Bank of America said: “The Fed cant print gold: Gold reach $3000, 50% above its record.”

Read also: Gold reserves in Sweden and the perspective of Gold?

Silver does not follow behind

During inflationary eras, silver and other hard assets are typically regarded as ideal stores of value, and silver’s dual character as both a precious and an industrial metal makes it distinctive. Solar panels, electric cars, LED lights, medical gadgets, and other goods employ metal in addition to coins and jewelry.

Silver is a suitable alternative for investors concerned about losing their buying power due to steady rises in the cost of goods and services. It can preserve your money in the case of ongoing high inflation or currency depreciation.

The amount of silver that lies in the earth’s crust is plentiful and exceeds the supply of Gold. Couple that with high gold demand, resulting in Gold being a rarer and thus more valuable asset relative to silver. For investors, though, silver can seem like a more affordable precious metal alternative.

The most common drawback when considering investing in Gold is its volatility. When using a cost-dollar-averaging strategy when investing, volatility should not be a problem in the long term.

Is Bitcoin as good as a protector as Gold?

Bitcoin is often considered Digital Gold, but new research shows that it is more correlated with the tech-heavy Nasdaq stock index.

While Bitcoin is increasingly correlated with stocks like Google and Tesla, it moved into a negative correlation with Gold, not serving the purpose of being “digital gold” anymore.

In today’s markets, inflation is unmistakable. The Bureau of Labor Statistics’ most recent Consumer Price Index placed annual inflation at 8.5 percent, the most it’s been since Ronald Reagan’s first term. This means that consumer goods are more expensive than they were a year ago because the dollar has lost its purchasing power.

It seems the same goes for Bitcoin and stocks. The Nasdaq is down 13% this year after a spectacular 2021. It’s no coincidence that this is roughly the same as Bitcoin, which has lost nearly 12% of its value.

Read also: Cryptocurrencies and Precious Metals – Differences and Similarities

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