What's going on?

The price of industrial commodities, like copper and iron ore, have swung wildly this year � and now they are on their way up, which could be a big deal for financial markets.

What does this mean?

China is the world�s biggest consumer of industrial commodities and, as such, it has a big impact on their prices. That was the case in 2015, when industrial commodities took a major tumble as China�s economy slowed. Similarly, in 2016 the Chinese government boosted its spending in an effort to improve economic growth � and commodity prices were driven sharply higher.


Just earlier this year, it seemed that China was oversupplied with commodities like iron ore, and prices once again took a tumble. However, the Chinese government has been restricting the supply by forcibly closing some particularly high-polluting iron ore plants, even while domestic demand is growing. Accordingly, the price of iron ore has yet again started to rise, hitting a four-month high on Monday. Copper, in the meantime, has hit a two-year peak following signs of high demand from within China.

Why should I care?

The bigger picture: Higher commodity prices tend to push up inflation globally.

When commodity prices rise, it gets more expensive for manufacturers to build their products (because they usually have to buy commodities in order to make them). The rising costs are typically passed on to manufacturers� customers (e.g. stores) over time and, ultimately, to consumers like you (in other words, it puts upward pressure on inflation).

For markets: Higher inflation would make it more likely that central banks raise interest rates.

We have written previously about the conundrum currently facing central banks: on most measures, developed economies are doing well enough to justify the removal of crisis-era support from central banks (i.e. policies that keep interest rates low). However, inflation remains stubbornly below central banks� targets. Commodity prices are just one factor, but if they do help push up inflation, it will make a stronger case for interest rate increases.