Commodities Peak Since April '23, Inflation Risks Soar

Commodity Spot Index hits year-high, stoking inflation fears amid supply disruptions and rising geopolitical tensions.

By Barry Stearns

5/15, 17:41 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF

Key Takeaway

  • The Bloomberg Commodity Spot Index reached its highest level since April 2023, signaling a new inflation threat.
  • Commodities surge due to supply disruptions, geopolitical tensions, and hedging against persistent inflation; crude oil and precious metals lead gains.
  • Despite the current rise, the index remains below its peak during 2022's pandemic-driven rally influenced by natural gas and grain prices.

Commodity Prices Surge

The Bloomberg Commodity Spot Index, a critical measure of raw materials prices including energy, metals, and agricultural products, reached its highest level since April 2023. This surge is attributed to a combination of supply disruptions, rising geopolitical tensions, and investors hedging against persistent inflation. Notably, crude oil has seen significant demand and supply concerns, particularly from the Middle East, while precious metals like gold and silver have attracted investors looking for safer investments. Copper's price increase further underscores the broad-based rally in commodities.

Inflation and Consumer Impact

The recent uptick in the commodity index comes amid broader inflationary pressures, with the US consumer price index (CPI) rising 0.3% month-over-month and 3.4% year-over-year. The report highlighted that shelter and gasoline were major contributors to this increase, accounting for more than 70% of the CPI rise. This scenario complicates central banks' efforts to manage inflation, as rising commodity prices can translate into higher costs for consumers and businesses, potentially leading to further increases in general price levels across the economy.

Market Implications

Sam Vogel of Cayler Capital remarked on the commodities rally as reflective of a late-cycle economic environment where demand outstrips supply. The firm anticipates a strong supply-demand balance for oil in the latter half of the year. However, the current commodities boom contrasts with the peak seen during the third summer of the global pandemic, driven then by natural gas and grains due to Russia’s invasion of Ukraine. The resurgence in commodity prices poses risks to consumer spending power and could impact real earnings growth, as noted by Vincent Cignarella of Bloomberg. With consumer borrowing slowing and buying conditions for durable goods at a one-year low, there's growing evidence of financial strain on households.

Street Views

  • Sam Vogel, Cayler Capital (Bullish on commodities):

    "Overall, the commodities rally reflects a late-cycle economic environment where demand remains robust but supply constraints are evident... In oil specifically, we expect a very strong supply-demand balance in the second half of the year."