Commodities: No Longer A Crude Shock

The efficient market hypothesis, endorsed by prominent economists like Friedrich Hayek and Milton Friedman, argues that asset prices immediately reflect all available information about the supply and demand of a given asset.

This conventional wisdom or economic orthodoxy has often been put to the test. However, the large, sustained gains followed by declines in commodities since the onset of COVID has only restored confidence in the markets’ ability to price in risks.

In the early days of the pandemic, demand plummeted amid the first wave of stringent lockdowns. Prices of commodities ranging from food to energy to industrial metals fell sharply. But as the world started to co-exist with the virus and demand recovered, supply remained disrupted, causing a surge in global commodity prices. The Ukraine war added to the demand-supply mismatch, with Russia being a major supplier of commodities like oil, gas, fertilizer and food, propelling prices even higher. Elevated commodity costs, particularly energy and food, have been the key driver of the global inflation surge.