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. 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. The story for Canada is strikingly similar.

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.

Important information

SEI Investments Canada Company, a wholly owned subsidiary of SEI Investments Company, is the Manager of the SEI Funds in Canada.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction. Our outlook contains forward-looking statements that are judgments based upon our current assumptions, beliefs and expectations. If any of the factors underlying our current assumptions, beliefs or expectations change, our statements as to potential future events or outcomes may be incorrect. We undertake no obligation to update our forward-looking statements.

The information contained herein is for general and educational information purposes only and is not intended to constitute legal, tax, accounting, securities, research or investment advice regarding the Funds or any security in particular, nor an opinion regarding the appropriateness of any investment. This information should not be construed as a recommendation to purchase or sell a security, derivative or futures contract. You should not act or rely on the information contained herein without obtaining specific legal, tax, accounting and investment advice from an investment professional. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. There is no assurance as of the date of this material that the securities mentioned remain in or out of the SEI Funds.