Commodity rally heightens inflation risks for stocks and consumer spending
Broad-based increases in commodity prices could intensify inflationary pressure, reduce corporate margins and affect consumer spending. This assessment was presented in a note by Bloomberg macro strategist Simon White, cited by a ZeroHedge article published by OilPrice.
The Bloomberg Commodity Index rose to levels last recorded in 2012, while the Quantix Commodity Index set a new record. In White's view, the rally in commodity markets is no longer primarily an oil story: energy commodities, industrial and precious metals, as well as agricultural products, are becoming more expensive.
Rising commodity prices
Since the beginning of August, European gas prices have risen by 34%, while gasoline prices have increased by 22%, the article says. Zinc, copper, silver, platinum, gold, sugar, cocoa and corn also became more expensive. At the same time, among the main commodities traded on futures markets, only a few items have fallen in price since the beginning of August, including hogs, cattle, nickel and orange juice.
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White noted that rising energy prices increase production costs, from industry to the food sector. The article also states that reduced available oil refining capacity due to the war with Iran contributed to high diesel fuel and gasoline prices and increased transportation costs. Prices for agricultural commodities are additionally under pressure, according to the author, due to the escalation of the Russian-Ukrainian war, particularly in the Black Sea region, and concerns over a strong El Niño event.
Risks for the stock market
The Bloomberg strategist believes that the spread of the inflation shock across a broad range of commodities creates risks for the stock market. He noted that during periods of high commodity prices, including in the 1970s and the early 2010s, stocks generally showed weaker performance. At the same time, the best periods for stocks occurred when commodity prices were relatively low.
According to the publication, the annual return of the Bloomberg Commodity Index over a 10-year period reached a level exceeded only in 2008 after the large-scale commodity rally of the 1970s. Copper set a new all-time high and traded above $14,700, while the price of iron ore in Singapore stood at about $100 per tonne.
