As talk of inflation continues to heat up, one asset class fueling the fire has been the commodities complex. In our one-year review of the market low, we noted how commodities had been some of the biggest winners during the market recovery. Well that trend hasn’t stopped yet, and as shown in the chart below, on Wednesday, the Bloomberg Commodity Index closed at its highest level since August 2015.
Whether this strength flows through to CPI or Core PCE (the Federal Reserve’s preferred measure of inflation) remains to be seen, but the technicals suggest this move could just be getting started. WTI crude oil is on the verge of breaking above a level of technical resistance that capped prices in 2019, while copper prices are less than 3% from their 2011 all-time highs. However, those who thought gold would benefit from inflation fears have been mistaken. In fact, of the 23 commodities tracked in the Bloomberg Commodity Index, gold is the worst performing year to date and one of the few that is actually negative over that time period.
To be clear, we are not calling for runaway inflation. In fact, breaking to five year highs shows that broadly commodities have gone nowhere over that time period. However, we do continue to have a bullish view of energy and industrial metals and wouldn’t be surprised to see this trend continue, albeit likely at a slower pace than the past year. If prices do continue to rise it may put more pressure on companies who are not able to pass those costs onto consumers. But if companies are broadly able to pass these increased input costs along, then expect price increases to begin showing up in traditional inflation measures, but any persistent impact is likely to be modest. Be sure to check out the LPL Research blog next Wednesday, as we examine the April CPI data release.
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