The 2020s Commodities Boom: How Long Before the Outlook Dives?

The link between commodities boom during recession and inflation is well-established. During a recession, central banks often lower interest rates to stimulate economic activity, which can lead to inflationary pressures. Inflation can also be driven by increased demand for commodities as economies recover. This was evident during the global financial crisis of 2008-2009, where a sharp increase in commodity prices occurred during the recovery phase.

Similarly, the COVID-19 pandemic in 2020 led to a sharp recession, followed by a commodity boom in 2021 due to a combination of factors, including supply chain disruptions and increased demand as economies reopened. The result was a surge in commodity prices, including oil, copper, and agricultural commodities that had continued well into 2023. It is important to highlight these dynamics between economic performance, and commodity rallies, to better outline market performance, and make better long term trading decisions. The link between commodity prices and inflation is made visually available by the St. Louis Federal Reserve.

To project when the outlook in the commodity markets can settle down a time-series analysis must be conducted using historical data to identify trends and patterns in commodity prices, such as the ones above. The analysis must also include macroeconomic variables such as interest rates, inflation, and GDP growth to identify the drivers of commodity prices. However, it is important to note that commodity prices are highly volatile and subject to various unpredictable factors such as natural disasters, political instability, and global events. Yet, based on current trends and projections, it is likely that the commodity boom will eventually settle down as global supply chains stabilise and interest rates cool down. However, the timing and extent of this will depend on a range of factors and will require ongoing monitoring and analysis.

The most likely estimate would be, not before FY2024. Given the reaction of markets to the increase in interest rates, multiple cases of bankruns, the subsequent banking crises, and ongoing Russian invasion of Ukraine, volatility is here to stay for the short-run. However, the CPI (Consumer Price Index) has been showing signs of improvement, with inflation in  North America, and the Eurozone, almost at the cusp of weathering down. This follows a decline in energy prices, and can be credited to deflationary fiscal policies aimed at slowing monetary velocity. Given the response of the Federal Reserve, the fallout of the bank failures has been prevented from adding fuel to the fire, and efforts from both banks, and the government, to reassure depositors of confidence in the institutions that govern them, have allowed for the stabilisation of outlook for the short run. To conclude, investors can expect the commodities rallies to continue through 23’, although as economic and geopolitical forces begin to stabilise, the inflated boom can be seen as a short term bubble, waiting to burst as growth returns.