Commodity prices have plunged back to pre-Ukraine war levels, in a sign that inflation is finally fading

• A slump in commodities prices has taken a key index back to its pre-Ukraine war levels, raising hopes that inflation may be fading.
• Oil prices have fallen to four-month lows. Copper has slumped 30% from recent highs, while wheat has fallen 40%.

For months in 2021, the world's central bankers and policymakers said inflation was "transitory." Now, their prediction may be coming true — albeit a very costly year late.

The prices of key raw materials from oil to oats have tumbled in recent weeks, taking the S&P GSCI commodities index back to where it stood before Russia invaded Ukraine in late February.

S&P's index — which measures the prices of energy, metals, agricultural goods, and livestock — stood at 664.15 on Wednesday, down around 20% from highs seen in both March and June.

Oil has slumped, and is trading only just above its February levels. Copper has tumbled roughly 30% from a high reached in March, while wheat is down more than 40% from recent highs.

The sharp drops in the prices of products consumers use every day is raising hopes that inflation will cool sharply this year, and that central banks such as the Federal Reserve won't have to hike interest rates to punishing levels.

Inflation is running at a 41-year high of 8.6% in the US. But as of Wednesday, traders in financial markets thought it would average just 2.5% over the next five years, according to a measure known as the breakeven rate. That's down sharply from the 3.7% rate expected in March.

However, the drop is a double-edged sword: traders and investors are ditching commodities because they think economic growth is going to slow dramatically, or even start going backwards. Investment bank Nomura this week said it expects a wave of recessions around the world, including the US.

"Broadly we should welcome what's going on," Ben Laidler, market strategist at trading platform eToro, told Insider. "All those indicators are all telling you the same thing — which is growth is slowing, and inflation's going to slow with it."

Nobel-prize winning economist Paul Krugman said Wednesday that the "runaway inflation narrative has now collapsed." He added that consumers and businesses would likely be cheered by the fall in oil prices, which is already bringing down prices at the pump.

There are a few big caveats, however. One is that many analysts expect oil prices to start rising again. They say Russian production is going to fall as the European Union slashes oil imports from the country, adding to the pressure in energy markets.

"I struggle to justify the scale of the sell-off we've seen," Warren Patterson, head of commodities strategy at Dutch bank ING, told Insider.

Patterson said demand for oil has grown much less slowly than many expected, suggesting some "demand destruction" has occurred, given consumers have cut back on using energy as prices have surged.

Yet he said he expects Russian oil production to fall by around 3 million barrels a day — from around 10 million at the start of the year — as the EU ban gradually comes into place. That will keep the market "very tight," he said.

Another caveat is that inflation isn't just being driven by commodities prices. Laidler of eToro said that for inflation to truly start coming down, central banks will have to hike rates to the point where unemployment rises and wage increases start cooling.

"Commodities is part of this, but there's a lot more going on," he said. "In the US, the labor markets are a much bigger deal than energy prices."

That said, the fall in commodities looks to be a turning point for inflation, according to Laidler. The only worry, he said, is there have been false dawns before. Only time — and official CPI inflation data — will tell.