The surge in capital inflows into commodities has alarmed "traders" about inflation: global inflation may resurface within 6-9 months

As the mainstream market cheers the end of inflation, a group of investors known as "inflation traders" is sending a starkly different warning through the commodities market.

The Federal Reserve unexpectedly cut interest rates early this morning, while the financial environment has not tightened and the economy is not in immediate danger. This move, combined with the continuously declining U.S. Treasury yields and record-high stock markets, seems to paint a picture of inflation being tamed.

However, the flow of funds in the commodities market tells a completely opposite story. According to Bloomberg macro strategist Simon White, commodity fund inflows are expected to continue rising and accelerating for most of 2025, a pattern that previously appeared before rapid inflation in 2020/21 and 2009. The current rise in metal prices warns that inflation may follow suit in the next 6-9 months.

Leading indicators of inflation are sending increasingly strong signals that price pressures are about to accelerate. If commodity investors are correct in their judgment, they may reap substantial rewards, just as the Bloomberg Commodity Index surged 130% during the inflation rise from 2020 to 2022.

Commodities Market: The Closest Barometer of Inflation

White states that the commodities market is closer to the essence of inflation than other markets, as rising raw material prices are often a precursor to broader price increases.

Commodity inflation quickly permeates the manufacturing and industrial sectors, subsequently pushing up input costs for upstream companies. Soon after, commodity prices rise broadly, creating wage pressures and pushing up service prices. Historical data shows that metal prices lead global CPI by about 6-9 months.

The rise in metal prices this year is a warning signal that inflation is about to follow suit. Although oil has been the biggest drag on the commodities complex, with the market facing an oversupply issue, the stimulus policies in some countries may soon turn crude oil prices around. The acceleration of real monetary growth typically leads oil price growth by 3-6 months.

Strong Signals from Commodity Indicators

White indicates that commodity traders may make decisions based on their judgments about commodity trends, and inflation typically follows. Several leading indicators of inflation are sending strong signals that price pressures are about to accelerate.

The inflation leading indicator, which integrates manufacturing, monetary, and commodity data, has firmly remained above 2% over the past few years and is currently rising at an accelerating pace, leading CPI by about 3-6 months. Other inflation leading indicators show the same trend, with freight prices rising and fertilizer prices also increasing, the latter leading food CPI.

What worries the Federal Reserve the most is that non-cyclical inflation is rising. This includes components of core PCE that are least correlated with monetary policy, making them the hardest for the Federal Reserve to control directly.

Despite gold being in the spotlight recently, the rebound in commodity fund inflows has a broad foundation. Gold ETFs are among the largest commodity ETFs, and inflows have been rising. Even excluding gold and precious metal ETFs, the remaining data clearly shows that commodity fund inflows are distinctly rising and accelerating It is worth noting that the inflow of funds into US gold ETFs has been surprisingly slow, especially considering the steady rise in gold prices, reflecting a sense of complacency regarding inflation in other parts of the market. The situation is similar in Europe, with only in Asia where ETF buyers' enthusiasm for gold reveals concerns about inflation or financial stability.

Excessive Confidence in Stock and Bond Markets

Excessive confidence in inflation is also evident in the stock and bond markets. White stated that inflows into the largest US stock and bond ETFs are at or near high levels, with no significant signs of decline.

In the inflation-ridden 1970s, the worst-performing major asset classes were stocks, corporate bonds, and US Treasuries. The current inflows into stocks and bonds do not reflect market expectations similar to that period. At that time, inflation sharply rose, then fell to a higher low, before accelerating again and reaching new highs in the next decade. Commodities were the only asset class that provided significant positive real returns in the 1970s.

Treasury Inflation-Protected Securities (TIPS) were the only other major asset class during that decade with real returns above zero. Today, inflows into inflation-protected bonds have increased, but the pace lacks panic or anxiety