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A new commodities boom is complicating central bankers’ anti-inflation efforts and may help derail prospects for significant interest-rate cuts any time soon.

Even before Iran’s attack on Israel over the weekend stoked fears of a wider regional war and disruption to oil supplies, crude had already risen significantly this year. 

That advance, together with a renewed exuberance in markets for precious metals and other raw materials, has pushed the Bloomberg Commodity Spot Index to an almost seven-month high.

The rally in oil makes gasoline costlier in the US, where pump prices are a political hot-button issue, especially in an election year. 

Copper, which is essential for wiring, plumbing and industrial machinery, is at highs last seen in mid-2022. Coffee prices have also leaped this year, while cocoa’s surge to an all-time high has thrown the chocolate industry into disarray.

Last week, the US core consumer price index rose more than expected, delaying expectations for a US Federal Reserve rate cut. Two of the biggest drivers were gasoline and electricity prices.

“This latest rally makes it much tougher for central banks to ease interest rates,” said Trevor Woods, chief investment officer of Northern Trace Capital LLC, which is long across several commodities.

Investors are piling back into exchange-traded funds that track commodity indices, with the 20 largest, broad-based commodity ETFs pulling in roughly US$1 billion since the beginning of March, according to data compiled by Bloomberg. 

At the same time, investors who fled commodities during the late-2023 selloff are now jostling to get back in.

“Stickier-than-expected inflation is a big part of commodity inflows, creating demand for portfolio hedges,” said Ryan Fitzmaurice, a senior commodities strategist at Marex.

“A rotation back into commodities would not surprise me given the recent CPI misses.” — Bloomberg.