Commentary
Commodities set to keep inflation hot
It’s no secret that inflation has been running hot.
Commodities set to keep inflation hot
Central banks around the globe began hiking interest rates in an effort to bring it down. Even though most measures have shown that inflation is cooling, SEI believes expectations for future inflation may still be too low.
Simply put, much of the recently lower inflation can be attributed to falling commodity prices. In our view, the trend in commodities seems ready to reverse higher, and higher commodity prices feed into costs and can contribute to inflation staying higher for longer.
Consumer prices jumped in 2008 ahead of the Great Financial Crisis (GFC), and then swung lower as the crisis took hold. Inflation trends reverted following the GFC and consumers enjoyed a relatively stable decade of modest inflation until COVID-19 shook the world. Following a brief but sharp decline, inflation as measured by the U.S. Consumer Price Index (CPI) soared to over 9% for the year ended June 2022. Inflation has notably cooled since then, and much of that can be attributed to falling energy prices. As shown in Exhibit 1, inflation for the all items CPI—which includes more volatile food and energy costs—is significantly less than the all items less food and energy CPI.
Looking at the trends in CPI, investors may believe that the inflation fight is nearing its end. Indeed many investors expect central banks to end their rate hiking cycles over the next few months or quarters, and then even cut rates at some point next year. As much as we would enjoy inflation receding to around 2%, we do not share that same optimistic view and see numerous reasons why inflation will potentially be higher for longer.
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