Commodities Rally Reflects a Better Economy, but Also Poses Inflation Risks

A surge in prices for the raw materials that power manufacturing and transportation shows investors betting on a prolonged expansion—and a potential rebound in inflation. 

An index of global commodities prices, the S&P GSCI, has advanced 12% this year, outpacing the S&P 500’s 9.1% climb. Copper and oil have gained more than 10% and 17%, respectively. Even gold is posting fresh records, rising 13% to $2,332 a troy ounce.

The rally is rooted in expectations that economic growth will increase demand from the U.S. and China, analysts said. A pair of reports last week showing recoveries in both countries’ manufacturing sectors helped spark a fresh wave of buying. That extended an upswing that has boosted shares of energy and materials companies while threatening to lift the price of gasoline just ahead of summer driving season.

And many expect the climb could continue for some time. Real income growth has sparked a reacceleration in global goods demand that is likely to propel commodity prices even higher, the Commodities Strategy team at Macquarie Group said in a report.