Key takeaways
Softer commodity prices have helped ease inflationary pressures on the U.S. economy.
Commodities comprise more than one-third of the Consumer Price Index, a widely cited measure of inflation.
Global economic growth trends often play a significant role influencing commodities markets.
Easing inflation over the past two years can be attributed in part to softer commodity prices. In October 2024, the trend continued, helping keep rising living costs in check. For example, key household expenses such as food and energy costs are closely tied to commodity price trends. Food prices, as measured by the Consumer Price Index (CPI), rose 0.7% in the three months ending in October 2024, a slight upturn. Energy costs, however, declined nearly 3% over that same period.1
“People often look to commodities as an investment to help offset inflationary impacts, but that’s not an issue in the current environment,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “For investors, it’s a time to approach commodities markets with a sense of caution.”
Commodities make up more than one-third of the CPI, considered a primary inflation measure. In the one-year period ending in October 2024, commodity prices reflected within CPI declined 1.0%.1
Commodities represent a wide range of assets, including everything from energy and agricultural products to precious and industrial metals. Prices of different commodities can vary, though all tend to be affected by factors such as production levels (supply) and consumer and business demand. Economic factors also tend to come into play. For instance, during global economic recessions, energy demand tends to subside, often driving prices lower.
Economic factors likely affected recent commodity price trends. “We’re not getting enough demand growth today,” says Haworth. “There’s significant concern about economic growth in major global economies such as China and Japan that’s weighing on commodity markets.”
What is the likely direction of commodity prices going forward, and how might investors consider positioning their portfolios to reflect these trends?
Energy prices are among the most visible of commodities, a category subject to significant volatility, often driven by world events. Since 2020, the market price for a barrel of crude oil ranged from a low of just above $10/barrel in the early days of the COVID-19 pandemic to as high as $120/barrel in the immediate aftermath of Russia’s 2022 invasion of Ukraine. More recently, supplies have grown, demand moderated and today oil prices hover in the $70/barrel range.2
“People often look to commodities as an investment to help offset inflationary impacts, but that’s not an issue in the current environment,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management.
Haworth notes that the U.S. government, which tapped its strategic petroleum reserve in times when oil prices soared, is now working on rebuilding its reserve. “The demand created by refilling the reserve is providing a floor for oil prices,” says Haworth. The future of oil production and demand raise questions about the direction going forward.
Saudi Arabia led an OPEC production cut hoping a price increase would result. Now the Saudis appear ready to boost output. President-elect Donald Trump has promoted stepped-up U.S. drilling activity. However, higher production could result in an oversupply, dampening prices. If oil prices drop from current levels, drillers may choose to slow production. In addition, says Haworth, oil rig obsolescence is another limiting factor. “Many oil rigs are old and need to be retired, and there’s not a major push to build more to replace that capacity,” says Haworth. “If producers choose to add more rigs, potential oil price ramifications could make the economics less attractive.”
The broad Bloomberg Commodity Index is down 1.9% for the year (through November 13, 2024).3 Agricultural commodity prices have declined year-to-date, with futures market corn prices down close to 10%, wheat contracts nearly 14% lower, and soybean prices down 29%.4 Lower prices for raw agricultural products contributed to a slowing of food price inflation.
Metals prices can be considered in two categories – precious metals such as gold and silver, and industrial metals used in manufacturing, such as nickel and copper for electric vehicle batteries. Gold prices dropped to a low of $1,831/ounce in October 2023, but by the end of October 2024 rose to more than $2,800/ounce, a jump of 53% in less than one year. However, in November’s first half, gold prices dropped by 8%.5
“While gold prices often rise in conjunction with inflation, the recent upturn in the face of inflation’s decline may have reflected significant global central bank gold demand,” says Haworth. “However, with inflation slowing, it’s not certain that it’s a sustainable trend.”
As for industrial metals, Haworth says supply concerns are an issue, particularly with more robust demand driven by increased production of electric vehicles. Minerals such as cobalt and nickel are key components for electric vehicle batteries. “We have longer-term supply issues,” says Haworth, “but in the near term, trade constraints such as tariffs have slowed demand.”
Investors sometimes consider including commodities as a portfolio hedge during inflationary periods. Higher inflation tends to enhance commodities’ attractiveness. “The challenge,” according to Haworth, “is that when you invest in a specific commodity, you have to get both decisions right – buying it cheap enough, and having the ability to sell it at a higher price.” Haworth notes that in the meantime, investors are not “paid” in the form of income while they wait for price appreciation.
Haworth says commodities are sometimes more effective as a tactical position in a portfolio. “It’s difficult to earn a durable return with direct investments in commodities or commodity futures,” he warns. “Given the state of today’s global economy, it’s not at all clear that the environment will result in higher, near-term commodity prices.”
Investors should be prepared for frequent changes, both higher and lower, in commodity prices. Talk with your financial professional about the appropriateness of a commodities position in your portfolio.
Commodity prices, such as crude oil and agriculture products, rose in 2021 and for part of 2022, partly due to supplies failing to keep pace with growing demand. Rising commodity prices contributed to increased inflation during that period. Through most of 2023, commodity prices in general moderated, declining significantly from previous highs. This reflected improved supply and lagging demand, particularly for specific products such as oil and natural gas. Through April 2024, oil prices moved higher, but leveled off again since, according to the U.S. Energy Information Agency.
Typically, changes in commodity prices can drive inflation trends. According to the U.S. Bureau of Labor Statistics, commodities make up more than 35% of the Consumer Price Index, the most watched inflation measure. When inflation began to surge in 2021 and 2022, higher commodity prices, such as for food and gasoline, played a big role. When inflation numbers improved after peaking in mid-2022, declining energy prices and slowing food costs also played an important role.
Investors sometimes consider including commodities in a portfolio to hedge the impact of higher inflation. But it can be difficult to earn a durable return with direct investments in commodities or commodity futures. Investors must be aware that commodities tend to be a volatile asset class, and it is difficult to choose the right time to invest when prices can shift significantly in a short period of time. One effective way to capitalize on today’s commodities market is through investments in infrastructure. This includes companies involved in oil pipelines, airports, cell towers, toll roads and other forms of infrastructure. Along with capital appreciation potential, these investments also tend to provide a regular income stream.
As the Federal Reserve eases monetary policy with interest rate cuts, what opportunities does this create for bond investors?
There are multiple ways to invest in commodities, but the risks are high and the returns are unpredictable.
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