The inflation rate is often considered a backward-looking indicator. Statisticians must compile data from the past month, crunch the numbers, and then release a report to the public. By the time this information reaches the news, the situation has already evolved.
I prefer viewing commodity prices as a forward-looking indicator of inflation. Nearly everything we manufacture and utilize is derived from commodities. Rising commodity prices signal increasing input costs for manufacturing, encompassing energy costs for operating plants and transporting goods. These increases in cost are typically passed down to consumers, raising the cost of living and nudging the inflation rate upwards.
A quick method to gauge this is by looking at Commodity ETFs, such as the Invesco DB Commodity Index ETF (DBC), which holds a diverse portfolio of commodity futures contracts, including crude oil, gasoline, and gold.
DBC has increased by 7.8% year-to-date.
Next, we delve deeper into some commodities.
Crude oil has surged 24% year-to-date, as measured by the United States Oil Fund (USO).
Gasoline has risen by 19% year-to-date, as indicated by the United States Gasoline Fund (UGA).
Gold has reached an all-time high, with the SPDR Gold Trust yielding a 12% return year-to-date.
The rise in gold prices has had a spillover effect on silver, with the iShares Silver Trust (SLV) gaining 14% year-to-date.
Agriculture has shown mixed results. Cocoa prices have soared by 120% year-to-date, whereas wheat (Teucrium Wheat Fund WEAT) and corn (Teucrium Corn Fund CORN) have decreased by 8% and 7% year-to-date, respectively. Sugar has increased by 6%, as represented by the Teucrium Sugar Fund (CANE).
Although some commodities have seen declines, the majority have appreciated year-to-date, with ten of them outperforming the S&P 500 ETF (SPY) this year (see the table below.) This trend is concerning, as it suggests that inflation rates may rise in the coming months, potentially delaying interest rate cuts and adversely affecting the stock market.
Crude oil prices are particularly noteworthy, affecting nearly everything due to their role in energy production and transportation. With a year-to-date increase exceeding 20%, the trend seems unlikely to reverse soon.
The rise in crude oil prices has also led to gains in energy stocks, as evidenced by the 15% increase in the Energy Select Sector SPDR Fund (XLE).
This suggests potential opportunities in energy stocks. Below is a list of such stocks within the S&P 500 index, ranked by year-to-date returns:
The recent strength of the commodity market indicates that inflation rate might climb once more. Although the inflation rate has decreased to a more manageable level, we must avoid complacency. It doesn’t mean we should sell all our stocks but we can be more cautious in the stock market, demanding a higher margin of safety before we buy and avoiding speculative ventures. Also, we can consider hedging with commodity-related securities.
