Metals as the New Oil? Understanding Inflation in a Renewable-Driven World

This IMF study reveals that metals price shocks, increasingly relevant due to the global energy transition, have lasting effects on core inflation, unlike the more immediate but short-lived impact of oil shocks. As metal dependency grows, central banks may need to adapt their inflation strategies to address these persistent pressures.

In a recent working paper from the International Monetary Fund, researchers Jorge Miranda-Pinto, Andrea Pescatori, Martin Stuermer, and Xueliang Wang explore a compelling and understudied dimension of inflation dynamics: the inflationary effects of metals price shocks across production networks. With the global economy increasingly transitioning from fossil fuels to renewable energy, metals like copper, aluminum, and lithium have become central inputs for many green technologies, from electric vehicles to solar and wind infrastructure. However, the study reveals that these metals price shocks affect inflation very differently compared to traditional oil price shocks, leading to long-lasting effects that could reshape how economies and central banks understand and respond to inflation.

The Surging Demand for Metals in Green Energy

As countries shift toward a low-carbon economy, the demand for metals is anticipated to rise sharply. For example, projections suggest a 1.5-fold increase in demand for copper by 2030 as industries adopt more energy-efficient practices. Yet metals are geographically concentrated, which means price shocks in a single source market can have broad and prolonged impacts worldwide, making the energy transition both a source of volatility and a potential risk to inflation stability. In this study, the researchers applied a sophisticated production network model, using input-output tables from various countries, to examine how metal price increases ripple through interconnected sectors. By examining production networks, they could determine that metals price shocks do not merely affect the cost of products directly involving metals but permeate through layers of industry supply chains, especially in investment-heavy sectors like machinery, construction, and electrical equipment manufacturing. This indirect influence means that, unlike oil price shocks, which predominantly affect headline inflation, metals price shocks have a substantial effect on core inflation—the component of inflation that excludes volatile items like food and energy. Their research found that metal price shocks not only lead to significant inflationary effects but are also more persistent than oil price shocks, indicating that economies with greater reliance on metals in their production processes could face lasting inflationary pressures.

Metals Price Shocks: A Unique Driver of Inflation

The researchers found that an exogenous increase in metals prices, like a one percent rise in copper, can lead to an approximately 0.02 percentage point increase in both core and headline inflation after twelve months. This impact grows over time, reaching 0.05 percentage points for headline inflation and 0.03 for core inflation after two years. Because copper alone constitutes about 30 percent of the world’s trade in industrial metals, these estimates likely represent a conservative lower bound of the overall inflationary effect that a generalized rise in metals prices could trigger. Countries with high exposure to metals in their production networks, such as China and Japan, are particularly vulnerable to these inflationary effects, as these economies tend to utilize metals extensively in manufacturing and construction. For countries with significant metal exposure, a one percent increase in copper prices can elevate headline inflation by 0.03 percentage points after a year and core inflation by 0.05 percentage points after two years. By comparison, oil price shocks while impactful on headline inflation do not have the same persistence on core inflation, which could decline after about forty months.

Why Central Banks May Need a New Inflation Strategy

The study suggests that central banks need to adjust their inflation models to account for this shift in inflation dynamics. Unlike oil, which primarily impacts downstream sectors such as transportation and utilities, metals are integral to the production of capital and investment goods, amplifying their inflationary effect through interconnected sectors. As the demand for these metals increases due to global energy transitions, the potential for inflationary shocks grows, but unlike oil, these shocks may be less visible in headline figures while still driving core inflation over an extended period. This fundamental change in the sources of inflationary pressure could mean that central banks need to reconsider how they respond to inflation stemming from commodity price changes. Historically, central banks have often “looked through” temporary spikes in oil prices when setting monetary policy, as oil-driven inflationary effects tend to be more transient. However, metal price shocks, particularly in a more metal-intensive global economy, could demand a different approach, as these shocks impact core inflation with greater persistence. If core inflation becomes increasingly driven by metals prices, central banks may find that the tools used to manage inflation need to be recalibrated to address this new source of prolonged inflationary pressure.

Geopolitical Shifts and Trade Barriers Worsen Volatility

The researchers also highlight that the geopolitical factors and trade restrictions affecting the metals market could amplify these inflationary pressures. Geopolitical tensions have led to an uptick in trade restrictions on metals, with restrictive policies doubling since the onset of the Ukraine war. Given that metals are often produced in concentrated regions with few substitutes, disruptions in supply can lead to sharp price swings. For example, U.S. tariffs on Chinese aluminum and steel in 2024 have already introduced price instability into production networks reliant on these materials. With trade fragmentation likely to persist, price volatility in metals markets could increase further, raising the risk of inflation driven by supply-side pressures on core inflation rather than only on headline numbers. Such factors suggest that as the world moves toward more renewable energy and green technology, managing the impact of metals on inflation will be crucial.

The Path to a Metals-Intensive Global Economy

Overall, the research indicates that metal price shocks pose an inflationary risk that could persist and evolve as the global economy continues its energy transition. Central banks, traditionally focused on the immediate and visible impacts of oil prices, may now need to anticipate and address the more gradual and pervasive influence of metals prices on core inflation. This shift signals that an increasingly metals-dependent economy may face inflation that is both more persistent and structurally embedded, reshaping the tools and strategies needed for effective inflation management in the years to come.