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The impact of rising commodity prices

Henderson New Star’s Money Moves Markets blog has some graphs and numbers on the large (20%) expected increase in British manufacturers input prices as a result of the 55% gain in sterling terms of commodities.

The post suggests that sterling is weak enough, and demand is recovering strongly enough, for manufacturers to pass these price increases on. In terms of the effect on domestic inflation, this cannot be good, but it is worth bearing in mind a few factors that offset the effects of input price inflation, as well as some likely consequences:

• manufacturers will substitute cheaper alternatives where possible,
• in some industries some substitution of labour (cheaper because sterling is weak) for expensive commodities may be possible (e.g. where it is more work to use a cheaper substitute),
• given that the UK recovery is weak, price rises will lead to lower volumes,
• the demand may shift to other products and UK supplies services.

From an investor’s point of view, this needs to be applied at the industry and company levels.

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