HomeCommodity Boom Continues Fueled by Economic Growth and Fears of Inflation

Commodity Boom Continues Fueled by Economic Growth and Fears of Inflation

US inflation data is due later today. Commodity prices continue to rise as economic growth picks up, yet the Fed sees no reason to end the easy monetary policy.

The commodity boom continues as commodities have one of the best starts to the year in decades. Energies, food and lumber prices keep pushing for higher highs, fueling fears of higher inflation.

Benchmark copper prices have recently reached an all-time high above $10,200/ton on the London Metal Exchange. “Dr. Copper”, as traders call it, serves as a benchmark for economic growth.

The theory of the business cycle says that an economy moves in different phases. After growth, it peaks, then contracts, reaches a bottom at the trough and then expands again. Copper prices serve as a tool to identify global economic growth – judging by the record-high levels, the global economy is about to take off.

Fed’s Bullard – Inflation Is Transitory

Commodities are traditionally viewed as a hedge against inflation. As alternative investments, they are traded mainly on future exchanges, being marked to market daily.

In an interview with CNBC yesterday, Fed’s Bullard argued that while higher inflation is expected, it is likely to be transitory. Also he insisted that the Fed should be in no hurry to reverse the easy monetary policy, thus not offering any hint of tapering the quantitative easing.

Investors, therefore, are on their own. On the one hand, the commodity boom suggests stronger economic growth ahead and rising prices. Because the US is the largest economy in the world, it will witness them both.

On the other hand, the Fed officials insist that the easy monetary policy should remain in place. Record commodity prices are not enough, especially given the fact that the Fed changed its definition of price stability in 2020.

During the Jackson Hole Symposium last August, the Fed announced that it is altering its mandate from targeting 2% inflation to averaging 2% inflation. However, it did not mention the period used to average the inflation data.

To date, market participants remain in the dark about this, and it may be the answer as  to why the Fed is not worried about inflation. By letting inflation run above 3.5% for six months or so, for example, it may still not be enough to bring the average inflation to 2%, if the period they are considering is more than half a year.

All in all, with commodity prices at record highs and an accommodative Fed, inflation should come closer to the Fed’s target. How quickly it does so remains to be seen.

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