What Will A ‘Second Wave’ of Inflation Mean For Commodity Prices?

PCE Inflation Looms Large as Traders Anticipate Fed’s Next Move

The sudden shift in narrative comes after two hotter-than-expected inflation readings this month – have added yet another layer of complexity to the Federal Reserve’s efforts to bring inflationary pressures down to its 2% target.

Last week, traders quickly latched onto comments by Federal Reserve Governor Christopher Waller – one of the central banks most influential voices – signalled that January’s jump in consumer prices warrants caution in deciding when to start cutting interest rates.

“The strength of the economy and the recent data we have received on inflation mean it is appropriate to be patient, careful, methodical, deliberative – pick your favourite synonym,” Waller said. “Whatever word you pick, they all translate to one idea: What’s the rush?”

Bets on lower rates coming soon were so prevalent prior to the FOMC’s January meeting, which spurred Federal Reserve Chair Jerome Powell to caution that policymakers were unlikely to be in position to cut as of March.

According to GSC Commodity Intelligence – traders have not only removed March as a possibility, but have also started to price in that the Fed is on the verge of committing a major policy error by waiting too long to start cutting rates and thereby increasing the odds of a hard landing.

At the same time, an equally controversial debate is raging that perhaps the Fed’s next move from here could very well be “a surprise rate hike”.

Both of these scenarios now position the Fed’s preferred measure of inflation – PCE Inflation data, due for release this week – as the next big money-making opportunity, which traders will not want to miss out on!

Commodities Surge: Signs Point to Second Wave of Inflation

Expectations are running high that the January’s PCE Inflation figures will follow the recent trend and clock up another hotter-than-expected inflation reading.

And there are plenty of reasons.

One of those is skyrocketing Agricultural prices. According to the U.S Federal Reserve’s own economists, the uptick in Agriculture prices is a very reliable indicator that inflation could be heading back up this year.

In other words, a “second wave” of inflation could be on the way.

The impact of rising shipping costs due to disruptions in the Red Sea and the consequences of the global climate change crisis has sent Agricultural prices across the board from Coffee, Sugar, Cotton, Orange Juice to Cocoa surging to multi-year and all-time record highs.

And the rally might not stop there!

As traders know – there is a strong correlation between Commodities and Inflation. When Commodity prices accelerate at a red-hot pace, so does Inflation.