Wheat and oil prices surged after Ukraine launched an attack on a Russian naval ship, prompting warnings about the potential impact of escalating conflicts in the Black Sea Region increasing food and energy costs.
Benchmark wheat futures increased by up to 3.4pc, reaching a high price of $6.45 per bushel. Then they fell back down. Oil prices briefly rose to their highest level for nearly four months.
Experts say that rising tensions near the area through which vast quantities of grain and oil are exported could lead to inflationary pressures by pushing up energy and food prices.
Caroline Bain from Capital Economics warned that further increases in wheat prices would likely push them to the highs of last year, which could have “very serious implications” for food inflation.
She said, “You cannot underestimate the Black Sea’s importance.” About 70pc (of Russia’s grain) usually leaves the ports of the Black Sea, and for Ukraine it was more than 90pc before the war.
She said: “Any disruption in that trade will have major consequences.”
Oil and wheat prices jumped after Ukrainian drones attacked Russian ships in the Black Sea at the weekend. A warship and oil tanker were damaged.
These retaliatory strikes followed Russian attacks on Ukraine’s major inland port in the past week, and Moscow’s refusal to renew a UN-brokered Black Sea agreement last July despite warnings of its potential devastating effects.
Russia, the second largest oil exporter in the world after Saudi Arabia, has announced that it will reduce its exports by 300,00 barrels per day starting September. One fifth of Russia’s exports go through the Black Sea.
Ms Bain stated: “The oil market’s current situation is very tight due to the voluntary cuts in Saudi Arabia and the restraint on OPEC. Any disruption of that 20pc by Russia will send oil prices soaring.”
Inflation has been decreasing in advanced economies over the past few months. However, a shortage of wheat or oil could cause another round of price increases.
Ms Bain stated: “Food and energy prices were the initial spark for inflation and now we are in the second-round effects as these prices have fallen back.”
She said: “If the trade out of Black Sea grinds to a stop, we could definitely revisit the highs from last year for both oil and wheat.” The length of the black sea trade halt would determine whether it had a prolonged inflationary effect.
In June, inflation in the UK fell by more than expected and reached 7.9pc. The rise in food prices also slowed, but they remained 17.3pc above a year ago.
Direct buyers of Russian grain and Ukrainian grain include some of the poorest countries of Africa and Asia. However, a rise in global prices becomes a problem for everyone.
Ms Bain stated: “People in the UK who shop will see the same amount as someone in Africa, even though the supply into the UK is unaffected.”
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