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Are High Commodity Prices Becoming a Problem for the Fed?

About a month ago, HSBC Global Research noted a forecast for a "weak" bull market in commodities. New data shows that the US Consumer Price Index (CPI) for April rose by .3% from the previous month and by 3.4% year-over-year. Although inflation is still increasing, it is doing so at a slower pace. Meanwhile, in Asia, Beijing is working to stabilize its economy. Amid these developments, commodity prices, tracked by Bloomberg, have reached their highest level in a year. This poses a serious threat for Fed Chair Powell's efforts to combat the inflation monster. The persistently elevated inflation is due to the US Treasury spending like it's in a 'Great Depression,' which amounts to approximately $1 trillion every 100 days. 

Given all of this, the Bloomberg Commodity Spot Index - which tracks 24 energy, metal and agricultural contracts - moved higher by nearly one percent on Wednesday, tagging the highest level since April 2023. 

On a much larger timeframe, the BCOM index has retraced 50% of its total move from early 2020 lows during the onset of government enforced lockdowns spurred by Covid, and the blowoff top in the first half of 2022. 

Now BCOM is pushing higher, and this comes as Brent crude, one of the largest components of the index, has moved higher in recent months on a combination of stronger demand, tighter supplies, and disruptions in the Middle East due to multiple ongoing conflicts. There's also copper prices squeezing to new highs, as well as cocoa and coffee that have recently surged. 

"Overall, the commodities rally reflects a late-cycle economic environment where demand remains robust but supply constraints are evident," Sam Vogel, chief operations officer of Cayler Capital, recently noted. He said in oil markets, commodity trading advisers expect a "very strong supply-demand balance in the second half of the year." 

HSBC's Paul Bloxham and Jamie Culling asked clients last month: "Have commodity prices past the trough?" 

Their very simple answer: "It seems likely."

BCOM remains 24% below the all-time-high set in May of 2022. However, with stealth stimulus in the US, otherwise the $1 trillion the federal government is spending every 100 days, this will likely keep inflation and commodity prices elevated. 


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