One theme of 2021 so far has been the early signs of potential inflation. That may be one reason why bonds haven’t fared too well recently. In lagging numbers, the 1.7% rate of inflation (excluding food and energy costs) that we saw in March, was fairly tame. In fact, for much of the past decade we’ve seen numbers around that level or a little higher. That may be changing.
Now we are seeing prices spike for certain commodities. Lumber prices are perhaps triple what we’ve seen in recent history, and iron ore and corn have roughly doubled. Of course, these are some of the major price spikes only in specific goods. Yet still the Goldman Sachs Commodity Index (GSCI) is up 4% so far this year. It’s fair to conclude that rising prices and disrupted supply chains are a current trend. Will it last?
Here futures markets can be informative. Spot markets tell us the price of a commodity now, but spikes aren’t all that unusual there, the question is where to prices go next? Futures markets show the price at which these commodities are trading in subsequent months and even years.
They suggest the price spikes may peak in the next few weeks, especially for the commodities grabbing headlines today. However, despite some softening, these price increases are expected to persist. By the end of 2021, prices may fall back 10% to 20% if futures markets are any guide. Still, if it plays out that way then that’s still an inflationary trend given where prices sit today. Also, energy, which is perhaps the most influential commodity given it’s broad usage isn’t seen falling back much after its recent rally, when adjusted for seasonal trends.
Of course, futures markets could be wrong, but these are relatively deep markets used by market participants and traders. If they are wrong, then there’s money to be made, so they can offer a fair estimate of the market’s view, if not always a perfect one.
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The futures market suggests that we may be close to the peak for certain commodity prices. However, that the journey back down to earth may be slower than some expect. Certain prices may not stay quite this high, but could remain elevated compared to history. Also, even if prices do moderate in a few weeks, the path to get there could still be rocky given the daily moves we’re seeing currently.