Cereal and fuel prices may spoil the disinflationary optimism. Wheat is getting more expensive

Wheat prices are in the spotlight again due to the actions of Russia, which withdrew from the Black Sea Grain Initiative deal. Wheat rose to $732, its highest level in almost a month. The last few days have seen a total increase in prices by about 20%. If, on the other hand, the peak from a month ago is overcome, the price of wheat may rise to levels not seen since February 2023.

So how might wheat prices change on an annualized basis for July 2023?

The drop in wheat prices y/y will slow down

For May 2023, the price of wheat in relation to May 2022 decreased by 45%, favoring deflationary processes in food prices. In June, contract prices fell by 26% y/y, and at the moment, prices for July fall by only 7% on an annual basis. However, if the increase in wheat prices continues, we may not see a decline in annual terms.

FAO index may increase m/m

In June, the FAO world food price index amounted to 122,3 points, which was lowest reading since April 2021. Thus, in annual terms, the FAO index fell by almost 21% in June. However, this was due to a large base effect, as in July 2022 the food index fell by over 9% m/m. This means that the July 2023 reading may be above the June release, and due to the strong fall in prices in July a year ago to June last year, the combined FAO Food Price Index could mitigate its decline to around 10-11%. As a result, it may slow down and mitigate the disinflation process prevailing in the world.

Gasoline prices in the US are rising

Another element flattening the disinflation trend in CPI inflation gas prices in the US. Currently, the price of gasoline has increased to levels not seen since July 2022. Going back to June 2023 and comparing with June 2022, we saw a 28% decrease in gasoline prices. Currently, however, a decrease for July 2023 y/y may be as low as 14%. On the other hand, the data for August may even show an increase in annual terms, so deflation will shift to inflation of fuel prices.

Disinflation in retreat?

Again rising food prices and rising fuel prices may cause that deflationary processes will soon slow down and slowing it down in food and energy prices may take several more months.

Among other agricultural products, the prices of which skyrocketed on an annual basis, it is worth highlighting the prices Kakaowhich increased by over 45%, sugar prices which went up by 30% and soya prices which went up by 6%.

According to the Cleveland Fed model in the US inflation in July may amount to 3,36%, which would mean an increase from 3% in June, indicating a local low in the disinflation process. Core inflation for July could be 4,92%, PCE 3,41%, and core PCE could be 4,46%, according to the Cleveland Fed branch model.