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A recession looms as inflation pushes prices above consumer limits

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Prices for some of the world’s most important products – food, fuel, plastics, metals – are beyond what many buyers can afford. That is forcing consumers to cut back and, if the trend picks up, could push economies already battered by pandemics and wars back into recession.

The phenomenon occurs on a large and small scale. Soaring natural gas prices in China are forcing ceramic factories that burn the fuel to cut their operations in half. A US trucking company is considering shutting down operations because it cannot fully cover rising diesel costs from customers. European steel mills using electric arc furnaces are cutting back production as energy costs skyrocket and the metal becomes even more expensive.

In the developed world, the squeeze between higher energy and food costs could force households to cut back on discretionary spending like nights out, vacations or the latest iPhone. China’s decision to lockdown its main steel-making center amid Covid-19 could limit supply and push up prices on big items like appliances and cars.

“Overall, it signals what could become a recession,” said Kenneth Medlock III, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.

The International Monetary Fund is ready to cut its global growth forecast because of the war, and it sees recession risks in more and more countries, said Managing Director Kristalina Georgieva. Federal Reserve Chair Jerome Powell said Russia’s invasion of Ukraine is adding to inflationary pressures by pushing up the prices of food, energy and other commodities “at a time when inflation is already too high”. Curbing high inflation is a top priority and the central bank is poised to hike interest rates by half a percentage point if necessary, he said.

The danger is more acute in Europe, where energy bills are skyrocketing due to reliance on Russian supplies. Natural gas prices on the continent are six times higher than a year ago, electricity costs almost five times as much. These prices could merge with the conflict raging on the European Union’s doorstep to turn businesses and households against all kinds of spending.

“There is little doubt that inflation will remain high as a result of the war in Ukraine,” said James Smith, a London-based developed markets economist at ING. “Any resurgence in gas prices would result in demand destruction becoming more widespread.”

The momentum is playing out in products as ubiquitous as oil and as specialized as lithium, a key ingredient in batteries for consumer electronics and plug-in cars. Battery makers in China, who are paying five times more for the metal than they were a year ago, have to pass some of that cost on to automakers.

Fertilizer manufacturers that use natural gas as a feedstock have started to scale back operations over the past year. Italy, Germany and the UK are considering burning more coal next winter to reduce the need for gas in power generation. This would free up more fuel for industries like glass manufacturers and others steel mills that cannot easily replace it.

But that still may not be enough, and contingency plans are in place to limit demand. If oil prices stay high, demanding destruction looms. JP Morgan cut its second-quarter global demand forecast by 1.1 million barrels per day and its forecast for the remaining two quarters by about 500,000 barrels. Europe accounts for most of the cuts.

“Whether it’s motorists filling up their cars or heating or cooling their homes, this is a level that consumers are pushing back a bit, and we’ve seen demand destruction in the past,” Ryan Lance, CEO of ConocoPhillips, said on March 8 on Bloomberg TV. “People are starting to go easy on their behavior and change it.”

Gary Hamilton, owner of a freight forwarding company Missouri is considering suspending operations until costs come down. Although fuel prices in the US may seem comparatively cheap to Irish drivers, diesel averages $4.67 (€4.25) per gallon there. If prices go above $5.25, that’s enough for him. Part of the problem is that he doesn’t set his own prices; the companies he hauls for do it. If he charges higher rates as fuel prices go up, they’ll just “call the next man,” he said. “Fuel is killing us,” Hamilton said. “It would be cheaper for us to park our trucks and possibly lay off employees than just carry on.”

Similar to gasoline, food demand in developed countries does not typically change much with price. Buyers can change what they buy – For example, they opt for cheaper substitutes – but they still have to buy.

Still, restaurants are finding rising prices a hindrance as they try to restart business post-Covid. Gus Kassimis, owner of the Gemini Diner in New York City, said customers are ordering fewer steaks and seafood, which is why he reduced his purchases from suppliers by about 10 percent. Gemini raised prices once and is ready to do so again. “People are more careful about what they spend,” Mr Kassimis said. “I don’t know how much more consumers are willing to take.”

https://www.independent.ie/business/world/recession-threatens-as-inflation-pushes-prices-beyond-consumer-limits-41492816.html A recession looms as inflation pushes prices above consumer limits

Fry Electronics Team

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